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PROBLEMS  AND  EXERCISES 
IN  ACCOUNTING 


PATON  AND  STEVENSON 


"fell 

I 


GEORGE  WAHR,  Publisher 


Digitized  by  tine  Internet  Arciiive 

in  2008  witii  funding  from 

IVIicrosoft  Corporation 


littp://www.arcliive.org/details/exerciseproblemsOOpatoricli 


PROBLEMS  AND  EXERCISES 
IN  ACCOUNTING 


PREPARED  BY 


WILLIAM  A.  PATON,  Ph.  D. 

Professor  ol  Accounting  in  the  Universily  oi  Michigan 


AND 


RUSSELL  A.  STEVENSON,  Ph.  D. 

Proiessor  oi  Accounting  in  the  University  oi  Cincinnati 


Fourth  Edition 
Revised  and  Enlarged 


GEORGE  WAHR,  PUBLISHER 

AXN  ARBOR,   MICH. 

192 1 


HF£l>z^ 


(p¥'^ 


Copyright,  1921 

BY 

GEORGE  WAHR 


THE  ANN   ARBOR  PRESS 
ANN  ARBOR 


J 


PREFACE 

This  book  has  been  prepared  to  accompany  the  authors'  Priri' 
ciplcs  of  Accounting}  x\n  arrangement  of  the  material  in  chap- 
ters and  sections  corresponding  to  that  followed  in  the  other  text- 
book has  accordingly  been  adopted.  It  is  largely  in  view  of  this 
specific  purpose,  likewise,  that  many  of  these  problems  and  exer- 
cises, especially  in  the  first  few  chapters,  have  been  constructed 
with  little  regard  for  the  details  of  business  and  accounting  prac- 
tice. An  essentially  artificial  problem,  it  is  believed,  is  often  a 
better  means  of  developing  the  beginning  student's  knowledge  of 
a  particular  principle  or  procedure  than  a  concrete  case.  The 
teacher  must  remember  that  the  high  degree  of  interdependence 
existing  among  the  various  parts  of  the  accounting  mechanism 
makes  the  subject,  at  best,  one  of  peculiar  difficulty.  To  make 
initial  progress  in  this  situation  it  is  necessary  that  each  element 
be  taken  more  or  less  completely  from  its  setting  and  presented, 
detached,  for  the  student's  attention.  For  this  purpose,  evident- 
ly, a  cross-section  of  actual  business  practice  is  likely  to  involve 
far  too  many  considerations ;  as  the  financial  history  of  even  the 
very  small  business  has  in  it  all  of  the  important  accounting  ele- 
ments. Thus  "practical"  problems,  although  they  may  be  very 
appropriately  used  as  C.  P.  A.  examination  questions,  are  com- 
monly quite  unsuitable  for  classroom  purposes  in  the  fundamental 
course. 

On  the  other  hand,  there  is  no  reason  why  the  "made-to- 
order"  problem  need  be  seriously  inconsistent  with  the  underly- 
ing aspects  of  practice.  Indeed,  the  semblance  of  reality  should 
alw^ays  be  preserved  as  long  as  sound  pedagogy  is  not  thereby 
sacrificed.  Further,  as  the  student's  knowledge  of  the  subject 
grows,  more  realistic  and  complex  problems  may  well  be  intro- 

'Published  by  the  Macmillan  Company,  New  York  City. 


'-±\^i^ 


U 


4  PROBLEMS  AND  EXERCISES 

duced — problems  involving  many  of  the  principles  and  usages 
w^ith  v^^hich  he  is  already  familiar  as  well  as  the  specific  matter  in 
hand.  In  the  later  chapters  of  this  book,  accordingly,  quite  a 
number  of  exercises  are  found  which  have  been  adapted  from 
concrete  situations. 

In  a  few  cases,  the  instructor  will  notice,  a  question  or  prob- 
lem given  is  slightly  anticipative  of  material  which  has  not  been 
reached  at  the  corresponding  pomt  in  the  "Principles."  Such 
exercises  have  been  inserted  deliberately.  At  times,  it  is  believed, 
the  student  can  be  stimulated  to  further  effort  by  being  confronted 
with  a  query  or  a  problem  which,  as  far  as  the  ground  he  has  cov- 
ered explicitly  is  concerned,  is  just  a  little  out  of  his  reach.  In 
general,  however,  the  sequence  of  material  in  the  two  books  is 
identical. 

It  is  not  intended  to  imply  that  this  book  furnishes  all  of  the 
material  needed  for  the  laboratory  work  which  should  accompany 
the  course  in  principles.  The  amount  and  character  of  the  labor- 
atory material  used  in  the  university  accounting  course  does  and 
should  vary  widely,  and  depends  in  any  case  upon  the  purposes  of 
the  course,  the  training  and  ability  of  the  students,  the  character 
of  the  collateral  work  in  business,  and  many  other  factors.  The 
use  of  long  "sets''  is  favored  by  many  instructors;  and  there  is 
much  to  be  said  for  this  plan  provided  satisfactory  material  is 
available.  Undoubtedly  considerable  drill  is  required  to  develop 
clerical  efficiency  in  the  student  and  to  emphasize  adequately  the 
important  principles  of  bookkeeping.  Long  laboratory  assign- 
ments are  likewise  useful  as  a  means  of  "diluting"  the  more  diffi- 
cult parts  of  the  subject,  and  thus  enabling  the  student  to  "get 
his  bearings''  and  thoroughly  digest  his  text  material.  But  most 
of  the  practice  sets  in  use,  unfortunately,  consist  in  long  monoton- 
ous series  of  routine  transactions,  and  furnish  difficulties  which 
are  largely  arithmetical.  Working  such  sets,  rather  than  develop- 
ing the  analytical  powers  of  the  college  student,  is  likely  to  result 
in  at  least  partial  mental  paralysis  and  a  feeling  of  disgust  for  the 
subject.  It  is  due  in  part  no  doubt  to  this  unsatisfactory  char- 
acter of  the  available  laboratory  sets,  and  the  difficulty  of  prepar- 


PREFACE  5 

ing  long  exercises  which  are  satisfactory,  that  has  led  quite  a 
number  of  instructors  to  rely  solely  upon  short  exercises  and  prob- 
lems for  practice  work.  Certain  it  is  that  reasonably  successful 
courses  in  accounting  principles  are  being  given  in  several  uni- 
versities which  do  not  include  any  laboratory  work  in  the  conven- 
tional sense. 

A  convenient  folio  of  blank  forms  has  been  arranged  which 
may  be  used  by  the  student  in  working  these  problems  and  exer- 
cises. These  forms  are  designated  by  the  letters  A,  B,  C,  etc. 
Unless  a  reference  to  a  special  form  is  made  in  a  particular  prob- 
lem it  is  understood  that  Form  A  is  to  be  used.  These  folios  may 
be  secured  from  the  publisher, 

W.  A.  P. 

R.  A.   S. 
September  i,  1921. 


PROBLEMS  AND  EXERCISES 
IN  ACCOUNTING 


I 

THE  NATURE  AND  SCOPE  OF  ACCOUNTING 


I. 


Formulate  a  definition  of  accounting.     What  is  the  unit  of 
organization  with  ^which  accounting  deals  ? 


"The  practice  of  accounting  involves  three  phases:  (i)  the 
organization  and  construction  of  a  system  of  records,  accounts, 
and  procedures;  (2)  the  systematic  recording  of  business  transac- 
tions or  happenings — bookkeeping;  (3)  the  analysis,  reclassifica- 
tion, interpretation  of  these  recorded  data,  supplemented  by  a 
process  of  valuation,  in  terms  of  financial  statements  and  other 
reports  designed  to  serve  the  needs  of  the  managers,  investors, 
and  others  interested." 

Restate  the  above  in  your  own  words,  explaining  definitely, 
with  illustrations,  what  you  assume  to  be  the  nature  of  the  work 
in  each  of  the  three  branches  of  accounting  mentioned. 

The  Business  Enterprise 


Name  and  contrast  briefly  the  three  principal  types  of  pri- 
vate business  enterprises  found  in  the  United  States. 


S\%  \  '/•  '[  PFOJ^LEMS  AND  EXERCISES 

4. 

Whose  interests  predominate  in  the  business  enterprise?  Ex- 
plain. 

5- 

State  several  situations  outside  the  business  enterprise  proper 
which  may  require  something  in  the  nature  of  accounting. 

The  Need  for  Accounting  Analysis 

6. 

State  the  important  general  characteristics  of  the  modern 
industrial  situation  which  emphasize  the  need  for  an  accounting 
analysis  of  the  business  process. 

7- 

"The  development  of  credit  agencies  and  associations,  and 
trade  and  industrial  organizations,  has  been  of  some  influence  in 
fostering  the  extension  of  systematic  and  standardized  account- 
ing." 

Explain  why  this  might  be  expected  to  be  the  case. 

8. 

"The  advent  of  income  and  excess  profits  taxation  has  great- 
ly intensified  the  interest  in  accounting." 

Why  is  the  need  for  sound  accounting  magnified  by  the  im- 
position of  these  taxes? 

9- 

Give  several  illustrations  of  the  interest  of  the  public  in  the 
observance  of  rational  accounting  principles. 

ID. 

How  may  accounting  be  a  means  of  alleviating  business  dis- 
turbances ? 


NATURE  AND  SCOPE  9 

The  General  Problems  of  Accounting 

II. 

What  are  the  important  facts  which  the  owner  or  investor 
wishes  to  know  and  which  should  be  presented  by  the  account- 
ant? 

12. 

The  property  of  enterprise  A  is  owned  outright  by  one  indi- 
vidual. Enterprise  B  is  a  corporation  and  its  ownership  is  repre- 
sented by  stockholders,  bondholders  and  noteholders.  In  which 
case  is  the  need  for  sound  accounting  more  urgent?  If  the  ex- 
clusive ownership  of  enterprise  B  were  represented  by  a  single 
issue  of  capital  stock,  how  would  you  answer  the  above  question? 

13. 

Name  several  important  interests  other  than  the  immediate 
managers  and  owners  that  may  desire  information  from  the  ac- 
counts. 

14. 

"It  is  possible  for  competitive  enterprise  to  be  reasonably 
efficient  and  to  furnish  services  and  commodities  at  reasonable 
prices  without  the  use  of  elaborate  accounting  records ;  but  with 
the  development  of  public  control  and  ownership  the  importance 
of  accounting  is  greatly  magnified."  Without  assuming  the  truth 
of  the  first  clause  argue  for  the  validity  of  the  second. 

15. 

What  relation  have  increased  population  and  the  depletion 
of  natural  resources  to  the  development  of  accounting?  Name 
some  of  the  important  problems  facing  the  management  of  the 
typical  modern  enterprise  which  require  elaborate  statistical  in- 
formation for  an  adequate  solution. 


II 

THE  THEORY  OF  BALANCE  SHEET  ACCOUNTS 

The  Fundamental  Classes  of  Data 

I. 

Define  asset  or  property.  ]^Iake  a  list  of  the  important  class- 
es of  property  owned  by  some  enterprise  with  which  you  are  fam- 
iliar. What  is  the  important  element  which  all  these  items  have 
in  common? 

2. 

What  is  meant  by  the  term  "equities"  as  used  in  the  text? 
Make  a  list  of  the  equities  you  would  expect  to  find  in  a  retail 
clothing  enterprise. 

3. 

Define  the  balance  sheet.  Prepare  a  balance  sheet  for  some 
enterprise  with  which  you  are  familiar. 

The  Accounting  Equation 

4. 

■'The  equities  represent  the  equitable  dispersion  of  the  asset 
total  among  the  various  interests  having  financial  rights  in  the 
enterprise.  Thus  the  determination  of  the  equities  involves  a  pro- 
cess secondary  to,  and  dependent  upon,  that  of  discovering  the 
assets.  An  equational  statement  of  the  two  classes  is  accordingly 
inevitable." 

Restate  in  vour  own  words  and  discuss. 


THEORY  OF  BALANCE  SHEET  ACCOUNTS 


A  has  some  capital  which  he  desires  to  invest  in  business. 
He  becomes  interested  in  a  successful  retail  store.  The  records 
show  that  the  property  of  the  enterprise  (stock,  fixtures,  etc.)  is 
worth  $23,000,  and  an  inventory  verifies  this  figure.  B,  the  pres- 
ent proprietor,  oflfers  to  sell  out  to  A  for  the  above  amount.  Can 
A  proceed  intelligently  on  the  basis  of  this  information  alone? 
Explain  carefully,  drawing  a  general  conclusion. 

6. 

Classify  the  following  items  as  assets  and  equities : 

Store   Site    $  8,000 

Store   Building    35>ooo 

Warehouse  Lease   2,500 

Mortgages    12,000 

Office  Equipment    400 

Store   Equipment    2,000 

A,  Proprietor    16,000 

Merchandise   25,600 

Delivery  Equipment   1,800 

Notes  Payable  8,000 

B,  Proprietor 32,000 

Accounts   Receivable    2,500 

Notes   Receivable    400 

Worden  Supply  Co 6,000 

Miscellaneous  Accounts  Payable 6,200 

Cash    2,000. 

7. 

The  following  items  are  found  listed  in  the  financial  state- 
ments of  the  Stanley  Improvement  Co.:  Real  Estate;  Real 
Estate  Loans;  Furniture  and  Equipment;  Bills  Receivable; 
Capital  Stock;  Cash  in  Bank;  Other  Cash  Items;  Franchises; 
Bills  and  Accounts  Payable;  Accounts  Receivable;  ^lortgages ; 
X  Co.'s  First  Mortgage  Bonds. 


12  PROBLEMS  AND  EXERCISES 

Arrange  the  above  in  balance  sheet  form,  assuming  amounts. 
Can  you  be  sure  that  your  classification  in  this  case  is  correct? 
How  does  the  last  problem  differ  in  this  respect? 

8. 

On  June  30,  1921,  the  business  assets  of  E.  P.  Rowan  are: 
cash,  $1,600;  stock  of  merchandise,  $15,800;  furniture  and  fix- 
tures, $1,200;  delivery  equipment,  $830;  securities,  $5,300.  In 
addition,  J.  Peterson  owes  him  $650,  and  P.  H.  Hewitt,  $150.  He 
owes  James  Bros.  $1,250  on  open  account;  and  his  60-day,  6% 
note  at  the  First  National,  drawn  for  $1,000,  is  due  July  i. 

What  is  the  amount  of  E.  P.  Rowan's  interest  in  the  busi- 
ness?   Set  up  a  balance  sheet. 


The  City  Coal  Company  is  organized  December  i,  1920. 
The  proprietors  are  A.  B.  Culver  and  D.  E.  Flushing,  equal  part- 
ners. On  January  i,  1921,  you  are  called  in  to  prepare  a  balance 
sheet  showing  the  present  financial  condition  of  the  firm.  You 
find  assets  and  liabilities  as  follows:  cash,  $1,000;  coal,  $6,000; 
office  furniture  and  equipment,  $300;  note  payable,  $500;  due 
from  Homer  Homer,  $400;  supplies,  $50;  due  to  Babbitt  and 
Company,  $1,500;  unexpired  insurance,  $30;  rent  accrued  on  yard 
and  office,  $200.     Exhibit  this  statement. 

Assuming  each  partner  invested  $2,700  on  December  i, 
1920,  what  was  the  profit  for  the  month  of  December? 

10. 

H.  E.  Atz  and  X.  O.  Sears  form  a  partnership  to  conduct  a 
hardware  specialties  store,  each  investing  $10,000  in  cash.  An 
additional  $10,000  is  acquired  from  A.  D.  Rand,  the  partners  giv- 
ing their  joint  note  to  Rand  for  one  year  at  6%.  From  these 
funds  the  following  items  are  purchased:  building,  $7,000;  fix- 
tures, $1,000;  office  equipment,  $500;  supplies,  $200;  hardware, 
$9,000;    delivery    equipment,    $1,800.      Further   hardware    stock 


THEORY  OF  BALANCE  SHEET  ACCOUNTS  1 3 

amounting  to  $1,500  is  bought  on  time  (60  days)  from  the  B  Co. 
J.  y.  Ward,  a  local  carpenter,  installs  the  fixtures,  accepting 
merchandise  with  a  cost  value  of  $50  in  full  payment  for  his 
services.  The  partners  pay  the  D  Co.  $400  for  exclusive  selling 
privileges,  for  5  years,  with  respect  to  certain  specialities. 

Prepare  a  balance  sheet  showing  the  financial  status  of  Atz 
and  Sears,  partners,  at  the  conclusion  of  these  occurrences. 

II. 

The  following  statement  represents  the  balance  sheet  of  the 
Ebers  Mfg.  Co. : 

Assets  Equities 

Real  Estate $  25,000      Capital  Stock $100,000 

Factory  Building  ....  40,000      Bonds 70,000 

Tools  and  Alachinery.  28,000      Notes  Payable 8,600 

Alaterials  and  Supplies  60,000 

Notes  and  Accts.  Rec.  13,500 

Cash  12,100 


Total    $178,600         Total    $178,600 

The  entire  ownership  of  this  enterprise,  stocks,  bonds  and 
notes  (with  the  exception  of  capital  stock,  $1,000),  is  now  in  the 
hands  of  O.  D.  Hanson,  who  has  gradually  bought  out  all  other 
interests.  Assuming  that  all  of  Hanson's  property  is  invested 
in  this  company  prepare  his  personal  balance  sheet.  What  com- 
ment have  you  to  make  ? 

12. 

"In  many  cases  there  is  no  equation  between  the  two  sides  of 
the  balance  sheet.  It  is  a  well-known  fact  that  many  corporations 
are  greatly  overcapitalized,  having  issued  large  quantities  of  wat- 
ered stock.  Further,  the  liabilities  of  the  bankrupt  concern  com- 
monly exceed  its  assets." 

Discuss  critically. 


14 


PROBLEMS  AND  EXERCISES 


13. 

The  Blank  Co. 
Assets  Equities 

Real  Estate $  40,000      Proprietor  $  40,000 

Plant  and  Machinery.     60,000      Mortgage 60,000 

Supplies 20,000      Notes  Payable 20,000 

Cash 10,000     Accounts  Payable  ....      10,000 


$130,000  $130,000 

Discuss  the  above  statement.  Is  there  any  necessary  rela- 
tionship between  the  equal  items  in  the  opposite  columns?  Ex- 
plain. 

14. 

Distinguish  between  proprietorship  and  liabilities. 

The  Construction  of  Accounts 

15. 

State  the  significance  of  business  operation  in  terms  of  effect 
upon  balance  sheet  classes.  What  is  the  objection  to  attempting 
to  register  the  results  of  operation  directly  in  the  balance  sheet 
statement  ? 

16. 


The  following  record  is  found  among  some  papers: 

Cash 

+  $10,000 

— 

500 

— 

1,200 

+ 

610 

+ 

75 

+ 

64 

+ 

3,600 

— 

790 

+ 

140 

— 

6,200. 

THEORY  OF  BALANCE  SHEET  ACCOUNTS  15 

Is  this  statement  an  account  ?    Explain  fully.    Arrange  these 
items  in  conventional  account  form. 


17. 

Explain  in  your  own  words  the  construction  of  the  asset 
and  equity  accounts.  What  information  should  be  shown  by 
these  accounts? 

18. 

"The  parallel-column  or  'T'  account  is  a  very  satisfactory 
technical  device  for  three  reasons  :  ( i )  the  positive  and  negative 
classes  of  data,  each  of  which  may  be  of  intrinsic  importance,  are 
thus  separately  preserved  for  a  period;  (2)  it  makes  it  possible  to 
postpone  computation,  thus  saving  clerical  labor  and  reducing 
the  probable  number  of  errors;  (3)  figures  listed  in  parallel  verti- 
cal columns  can  be  combined  more  accurately  and  in  less  time 
than  figures  assembled  in  any  other  way — in  horizontal  columns, 
for  example." 

Explain  and  illustrate  each  of  these  propositions. 

Classes  of  Transactions 

19. 

Give  a  three-fold  classification  of  transactions  in  terms  of 
asset  and  equity  facts.  Illustrate  each  type.  Show  that  every 
transaction  gives  equal  entries  in  opposite  columns  if  all  the 
facts  are  recorded. 

20. 

Explain  the  effect  of  each  of  the  following  transactions  upon 
the  asset  and  equity  classes : 

(a)  Machinery  is  purchased' for  cash,  $500. 

(b)  Finished  goods  are  sold  for  $550,  cash;  assets  to  the 
amount  of  $475  are  consumed  in  producing  these  goods. 

(c)  Coal  is  purchased  for  cash,  $100. 

(d)  Owner  B  withdraws  $500  of  his  investment  in  cash. 


1 6  PROBLEMS  AND  EXERCISES 

(e)  Owner  C,  who  has  an  interest  of  $20,000,  retires  from 
active  control  and  receives  a  second  mortgage  on  the  assets  of  the 
enterprise  for  the  amount  of  his  equity. 

(f)  The  firm  discovers,  by  accident,  a  new  process  wortii 
$5,000.    The  cost  of  patenting  and  perfecting  is  $1,000. 

(g)  Notes  payable,  $5,000,  are  retired,  and  bonds  are  issued 
for  the  same  amount. 

(h)  Capital  stock,  $5,000,  is  issued  for  cash, 
(i)   Furniture  to  the  amount  of  $300  is  stolen. 

21. 

Rule  up  skeleton  accounts  and  record  the  following  transac- 
tions : 

(a)  The  firm  buys  goods,  $400,  on  account. 

(b)  The  firm  borrows  $500  from  a  bank  on  a  60-day  note. 

(c)  The  firm  settles  an  open  account  of  $200  with  a  note. 

(d)  The  property  of  the  firm  is  mortgaged  for  $4,000;  cash 
for  the  amount  of  the  mortgage  is  received. 

(e)  A  customer's  account,  $300,  is  paid  in  cash. 

(f)  The  finn  is  given  $500  anonymously. 

(g)  The  proprietors  invest  $25,000,  cash. 

(h)  First  mortgages,  $10,000,  are  issued  in  exchange  for  a 
partner's  equity  of  the  same  amount. 

(i)  The  mortgages  mentioned  in  (h)  are  retired  with  cash, 
Sio,ooo. 

22. 

On  Tan.  i  A's  balance  sheet  stands  as  follows: 

Assets  Equities 

Cash  $   300     A,  Capital  $1,600 

Goods 1,500     Xote  Payable 200 


$r,8oo  $1,800 

The  following  transactions  occur  during  January.  Goods  are 
sold  for  cash,  $800.  Merchandise  is  sold  on  account  to  G.  Gough, 
$200.    Later  Gough  gives  his  60-day  note  at  6%  for  $100  as  part 


THEORY  OF  BALANCE  SHEET  ACCOUNTS  17 

payment ;  turns  over  a  $50  bond  which  has  a  present  value  of  $48, 
and  performs  services  in  helping  to  operate  the  business  for 
which  he  is  allowed  a  credit  of  $52.  Merchandise  is  sold  on  ac- 
count to  X  Co.,  $200.  Goods  are  bought  on  account  from  the  X 
Co.,  $200.  Aside  from  Mr.  Cough's  assistance  A  furnishes  all 
necessary  services  himself ;  and  there  are  no  other  costs.  The 
value  of  goods  on  hand  Jan.  31  is  $450. 

Enter  the  above  data  in  skeleton  accounts  and  prepare  a  new 
balance  sheet  statement  as  of  Jan.  31. 

23- 

State  concisely  the  effect  of  each  of  the  following  upon  the 
firm's  balance  sheet:  (a)  new  investment  by  the  proprietors; 
(b)  borrowing  of  money;  (c)  payment  of  accrued  payroll;  (d) 
cash  purchase  of  real  estate ;  (e)  cash  purchase  of  postage  stamps ; 
(f)  an  embezzlement  by  the  cashier;  (g)  a  cash  distribution  of 
earnings;  (h)  receipt  of  cash  from  a  customer  on  account;  (i) 
credit  purchase  of  raw  materials;  (j)  payment  of  freight  on 
materials;  (k)  payment  of  a  creditor's  account;  (1)  gift  of  land 
from  the  local  Chamber  of  Commerce;  (m)  settlement  of  a  cus- 
tomer's account  for  50%  of  its  face;  (n)  payment  of  an  open 
creditor's  account  with  a  promissory  note  for  the  same  amount; 
(o)  transfer  of  raw  materials  from  storeroom  to  factor}^  (p) 
cancellation  of  a  prospective  customer's  order;  (q)  loss  by  fire  of 
fully  insured  property;  (r)  receipt  of  check  from  insurance  com- 
pany to  cover  fire  loss;  (s)  damage  by  earthquake  to  uninsured 
property. 

Double-Entry — Debit  and  Credit 

24. 

"  'Double-entry'  bookkeeping  does  not  mean,  as  some  seem  to 
suppose,  a  system  by  which  each  business  fact  is  recorded  tivice. 
Instead,  double-entry  is  essentially  a  system  by  which  every  asset 
and  equity  fact  in  the  particular  business  situation  is  set  down 


1 8  PROBLEMS  AND  EXERCISES 

once.  Any  scheme  which  accompHshes  this,  regardless  of  its 
technical  peculiarities,  is  true  double-entry.  The  term  is,  in  a 
way,  a  misnomer.  It  does  not  indicate  duplication,  but  refers  in- 
stead to  the  fact  that  at  least  tzi'o  distinct  effects  upon  the  financial 
status  of  the  enterprise  are  involved  in  every  business  transac- 
tion." 

Explain  and  support  this  statement.  What,  then,  is  meant 
by  "single-entry"  bookeeping? 

25. 

"Debit  that  which  receives  value;  credit  that  which  gives  up 
value." 

"Debit  that  account  or  person  which  is  entrusted  with  re- 
sponsibility; credit  that  account  or  person  which  acquits  itself 
of  responsibility." 

"Debit  indicates  facts  favorable  to  the  proprietor;  credit  in- 
dicates facts  unfavorable  to  the  proprietor." 

"The  term  debit  always  indicates  that  the  person  or  account 
debited  has  assumed  the  position  of  debtor  to  the  business;  credit 
always  indicates  that  the  person  or  account  credited  has  thereby 
assumed  the  position  of  creditor." 

"Debit  that  which  comes  into  the  business ;  credit  that  which 
goes  out." 

Discuss  the  above  statements  critically.  State  the  significance 
of  these  terms  as  used  in  the  textbook. 


Ill 

THE  CONSTRUCTION  OF  SUPPLEMENTARY 
ACCOUNTS 

Current  Asset  x\ccounts 

I. 

"To  carry  on  its  operations  successfully  the  typical  enter- 
prise requires  a  variety  of  current  commodities  and  services  as 
well  as  the  use  of  fixed  assets." 

Give  several  examples  of  fixed  assets.  Current  assets.  What 
is  the  character  of  an  account  which  is  used  to  show  purchases 
of  a  current  service,  ordinar}^  labor  for  example?  Give  rules  of 
debit  and  credit  for  such  an  account. 

2. 

"All  current  services  and  commodities  which  are  voluntarily 
acquired  by  the  business  enterprise  at  a  price  constitute  an  addi- 
tion to  the  total  of  its  wealth  or  property  at  the  moment  of  pur- 
chase." 

Explain  and  support.  In  view  of  the  fact  that  labor  serv- 
ices utilized  can  have  no  separate  and  distinct  existence  how  is  it 
that  the  cost  of  such  services  can  contribute  to  the  total  of  a  con- 
cern's assets? 

Expense  and  Revenue  Accounts 

3- 

"Accounting  transactions,  in  a  broad  sense,  can  be  classified 
into  three  groups :  ( i )  explicit  business  happenings  or  occur- 
rences, usually  involving  the  business  enterprise  with  some  out- 


20  PROBLEMS  AND  EXERCISES 

side  person  or  interest;  (2)  implicit  or  internal  occurrences,  i.  e., 
the  happenings  and  processes  of  change  which  represent  opera- 
tion in  the  strict  sense;  (3)  formal  book  entries,  the  classification 
and  re-classification  of  data  in  the  accounts  purely  for  purposes 
of  convenience,  there  being  no  accompanying  objective  happen- 
ings or  processes.'' 

Illustrate  each  of  the  three  types. 

4. 

"If  all  the  facts  involved  in  the  sale  transaction  could  be  im- 
mediately ascertained,  that  is,  if  the  entire  happening  could  be  at 
once  reduced  to  its  lowest  terms,  there  would  be  no  need  for  the 
use  of  supplementary  expense  and  revenue  accounts.  The  neces- 
sity for  such  accounts  arises  out  of  the  fact  that,  although  the 
kind  and  amount  of  assets  received  when  a  sale  is  made  (usually 
cash  or  accounts  receivable)  are  definitely  known,  the  value  of 
the  structures,  commodities,  and  services  which  have  expired,  and 
have  disappeared  from  the  business  embodied  in  finished  goods, 
is  usually  not  immediately  ascertainable." 

Show,  definitely,  that  this  is  the  case. 

5. 

■  "Gross  revenue  is  a  credit  item.  The  explanation  lies  in  the 
fact  that  revenue  is  an  amalgamation  of  two  more  fundamental 
elements,  i-iz.,  subtractions  from  assets  and  additions  to  owner- 
ship. Since  both  of  these  elements  are  credits  their  sum  is  like- 
wise properly  a  credit.  Periodically  the  expirations  of  purchased 
items,  the  costs  of  this  revenue,  are  deducted  therefrom  in  a  lump 
sum.  The  balance  precipitated  by  this  process  constitutes  the  net 
operating  revenue  for  the  period,  the  net  increase  in  equities. 
The  gross  revenue  credit  for  the  period  is  thus  a  provisional,  in- 
termediate figure  which  has  not  yet  been  reduced  to  its  lowest 
terms.  And  the  expense  for  the  period  is  the  cost  of  producing 
the  particular  volume  of  reirnue  which  Ms  originated  during  the 
period." 


CONSTRUCTION  OP  SUPPLEMENTARY  ACCOUNTS       21 

Explain  and  discuss.  If  a  business  were  being  operated  at  a 
loss,  i.  c,  if  the  assets  received  from  sales  were  less  in  amount  than 
the  expirations  occurring  concurrently,  what  would  be  the  proper 
explanation  of  the  gross  revenue  credit? 


Mr.  X  owns  a  rocky  hillside  much  favored  by  picnickers, 
but  having  no  other  use  whatever.  He  charges  each  person  mak- 
ing use  of  these  grounds  fifty  cents  a  \4sit.  He  has  no  expenses 
of  upkeep,  no  costs  of  collection,  and  taxes  are  negligible.  Pre- 
cisely how  should  the  sale  of  the  use  of  this  land  be  recorded  in 
Mr.  X's  accounts  and  how  would  each  such  transaction  effect  a 
balance  sheet  statement  of  his  financial  condition?  Can  you  give 
an  illustration  of  a  business  which  has  no  expenses? 

i  7- 

"Some  asset  items  pass  through  three  distinct  stages:  (i) 
purchase  or  acquisition;  (2)  utilization  and  conversion  to  new 
forms;  (3;  final  disappearance  from  the  business  embodied  in 
finished  goods.  In  other  cases  the  last  two  of  these  stages  are 
coincident.  Still  other  items  are  acquired,  utilized,  and  converted 
into  expense  virtually  instantaneously." 

Explain  fully,  giving  examples  under  each  of  the  cases  men- 
tioned. 

8. 

John  and  George  Hurley  begin  business  as  grocers  under 
the  firm  name  Hurley  Bros.  Each  partner  deposits  $5,000  with 
the  local  bank  to  the  order  of  the  firm.  A  store  building  is 
rented  for  $100  per  month,  a  month's  rent  being  paid  in  advance. 
Second-hand  fixtures  are  purchased  for  cash,  S600.  The  cost  of 
repairing  and  installing  fixtures  is  $100,  cash.  Goods  are  pur- 
chased from  a  wholesaler  for  $3,000;  the  wholesaler  accepts  a 
note  for  $1,500,  the  balance  is  paid  in  cash.  A  week's  advertising 
space   is   purchased   from   a   daily   paper,   $25.      Stationery   and 


22  PROBLEMS  AND  EXERCISES 

other  supplies  are  purchased  for  cash,  $35.  Goods  are  sold  for 
cash,  $180.  Goods  are  sold  on  account  to  various  parties,  $60. 
Goods  are  purchased  for  cash,  $750.  John  Hurley  decides  to 
withdraw  $2,500  of  his  capital  from  the  enterprise.  Fuel  is 
purchased  on  account,  $200.  Cash  sales  are  made  amounting  to 
$540.  Merchandise  is  sold  on  account,  $675.  Goods  are  pur- 
chased for  cash,  $860. 

Let  us  suppose  that  the  above  statement  is  a  record  of  all 
purchase  and  sale  transactions  for  a  period  of  two  weeks.  Organ- 
ize this  record  into  accounts.  Do  the  accounts  you  have  pre- 
pared represent  the  exact  present  status  of  the  enterprise?  Ex- 
plain. 

9- 

The  A.  B.  Co. 
Assets  Equities 

Real  Estate $40,000     A.  B.  Co.,  Capital $75.cxx) 

Fixtures 2,800      Notes  Payable  10,500 

Merchandise   38,500 

Supplies  3,000 

Cash   1,200 


$85,500  $85,500 

The  above  statement  represents  the  financial  condition  of  the 
A.  B.  Co.,  organized  and  ready  for  operation.  Open  the  neces- 
sary accounts  to  record  these  facts. 

During  the  first  week  of  operation  finished  goods  were  sold 
for  cash  to  the  amount  of  $1,200,  on  account,  $650,  and  in  ex- 
change for  promissory  notes,  $380.  Assets  were  consumed  as 
follows:  real  estate,  $90;  merchandise,  $1,100;  supplies,  $200: 
fixtures,  $15;  miscellaneous  services,  $180  (purchased  with  cash 
and  consumed).  Notes  outstanding  were  retired  with  cash  to 
the  amount  of  $500.  Merchandise  was  purchased  for  cash,  $900, 
on  account,  $4,100.  The  firm  borrowed  $1,000  from  the  bank, 
giving  a  6%  note. 


CONSTRUCTION  OF  SUPPLEMENTARY  ACCOUNTS       23 

Record  these  occurrences,  opening  any  necessary  accounts, 
and  prepare  a  statement  of  assets  and  equities.  What  important 
conclusions  can  be  drawn  by  comparing  the  two  balance  sheets? 
Contrast  this  problem  and  the  preceding. 

10. 

"Even  if  it  were  feasible  to  ascertain  immediately  the  un- 
derlying asset  and  equity  facts  involved  in  every  sale  transac- 
tion, it  would  still  be  convenient  from  the  standpoint  of  clerical 
efficiency  to  allow  revenues  and  expenses  to  pile  up  in  separate 
accounts  for  a  period ;  and  it  would  be  further  desirable  in  view 
of  the  fact  that  periodic  expense  and  revenue  are  operating 
facts  of  the  utmost  intrinsic  importance  from  a  managerial 
standpoint.'' 

Explain,  and  argue  in  support  of  this  statement. 

ir. 

Y,  a  schoolboy,  sells  pop  at  the  football  games.  At  the 
beginning  of  a  particular  day's  business  his  financial  condition 
might  be  represented  as  follows : 

Cash  $5.00     Y,  Capital $5-00 

He  buys  pop  to  the  amount  of  $4.50,  paying  therefor  in  cash 
and  reserving  fifty  cents  to  make  change.  During  the  day  his 
sales,  all  for  cash,  total  $9 ;  and  he  still  has  pop  on  hand  with  a 
return  value  of  fifty  cents.  He  furnishes  all  services  himself  and 
there  is  no  license  fee  or  other  cost. 

(a)  Record  this  entire  situation  in  balance  sheet  accounts, 
and  exhibit  a  new  balance  sheet. 

(b)  Record  this  situation,  making  use  of  supplementary 
expense  and  revenue  accounts. 

(c)  Compare  carefully  the  two  solutions. 


24  PROBLEMS  AND  EXERCISES 

Special  Equity  Accounts 

12. 

Distinguish  between  loss  and  expense.  Show  that  if  the 
operating  accounts  are  going  to  be  of  the  utmost  use  to  the  man- 
agement this  distinction  should  be  carefully  observed  as  far  as 
possible. 

13- 

Classify  the  following  as  loss,  expense,  or  asset,  giving  your 
reasons  in  each  case:  (i)  labor  cost  of  installing  a  new  machine; 
(2)  freight  paid  on  raw  materials  received;  (3)  loss  of  coal  by 
theft;  (4)  donation  to  Red  Cross;  (5)  damage  from  cyclone; 
(6)  shrinkage  in  value  of  securities  owned;  (7)  damage  paid  to 
shipper  by  a  railroad  company;  (8)  damages  received  from  em- 
ployer as  compensation  for  personal  injury;  (9)  lawyer's  fees 
paid  in  defending  patent  rights;  (10)  lawyer's  fees  paid  in  taking 
out  patent;  (11)  fire  insurance  premium  paid;  (12)  salary  of 
special  salesman;  (13)  cost  of  remodeling  a  building  so  as  to 
comply  with  regulations  of  the  local  health  department;  (14)  cost 
of  demolishing  old  shingle  roof  and  putting  on  tile  roof. 

14. 

Show  that,  in  separating  expenses  and  net  losses,  the  follow- 
ing questions  are  of  importance : 

(i)   Is  the  management  responsible   for  the  outlay? 

(2)  Is  the  cost  of  a  regularly  recurring  type? 

(3)  Is  any  benefit  conferred  on  the  business  by  the  outlay? 

15. 

Explain  the  following  transactions,  noting  particularly  their 
effect  upon  the  Net  Revenue  and  Surplus  accounts: 

(a)  Goods  are  damaged  by  fire,  $2,000. 

(b)  The  stockholders  are  paid  $5,000  in  cash  as  dividends. 


CONSTRUCTION  OF  SUPPLEMENTARY  ACCOUNTS        25 

(c)  The  firm  receives  $300  as  interest  on  bonds  owned. 

(d)  The  firm  pays  $400  in  interest  on  outstanding  mortgages. 

(e)  The  company  pays  an  income  tax  amounting  to  $3,500- 

(f)  The  company  is  given  a  factory  site  vahied  at  $5,000 
by  the  local  Chamber  of  Commerce. 

16. 

Define  deficit,  surplus.     Give   several  examples  of  current 
liabilities. 

Valuation  Accounts 


17- 

From  the  books  of  the  X  Co.  you  discover  that  although  the 
formal  capitalization  of  the  company  was  $100,000  the  stockhold- 
ers actually  received  their  stock  at  a  discount  of  10%.  What, 
under  these  circumstances,  was  the  true  initial  equity  of  the  stock- 
holders? 

You  further  find  that  the  Buildings  account  of  the  Company 
shows  a  debit  balance  of  $50,000,  and  that  Allowance  for  Depre- 
ciation of  Buildings  shows  a  credit  balance  of  $2,000.    Interpret. 

Give  a  definition  of  the  "valuation"  account  which  will  cover 
all  cases. 

The  Classification  of  Accounts 

18. 

\\'hat  is  meant  by  saying  that  accounts  must  be  classified  in 
terms  of  their  predominating  characteristics?  Which  of  the  ac- 
counts most  nearly  approximates  a  perfect  asset  account? 

19. 

"An  item  which  is  distinctly  an  asset  at  the  moment  of  ac- 
quisition may  be  recorded  in  an  account  which  is  essentially  an 
expense  account.''     Explain. 

What  is  a  "mixed''  account?    Illustrate. 


26  PROBLEMS  AND  EXERCISES 

20. 

Classify  the   following   transactions   into   debit   and   credit 
items : 

(a)  The  bookkeeper's  salarj-^  is  paid  in  cash,  $20. 

(b)  Coal  to  the  amount  of  $60  is  purchased  for  cash. 

(c)  A  customer  pays  his  account,  $75. 

(d)  Finished  goods  are  sold  for  cash,  $300. 

(e)  Finished  goods  to  the  amount  of  $600  are  sold  on  ac- 
count. 

(f)  The  account  mentioned  in  (e)  is  paid  in  cash. 

(g)  Depreciation  of  the  plant,  to  the  amount  of  $600,  is 
recognized. 

(h)  Fuel  has  been  consumed,  $100. 
(i)  The  machinery  is  repaired,  $50. 
(j)   Cash,  $200,  is  paid  for  labor  services, 
(k)   An  insurance  premium  of  $100  is  paid  in  cash. 
(1)  ]\Iiscellaneous  services  are  purchased  with  cash,  $100. 
(m)   Miscellaneous  services  are  consumed,  $i(X). 
(n)  The  firm  gives  $100  in  cash  to  the  Red  Cross  society, 
(o)   Cash  is  received,  $400,  from  a  lease  covering  a  portion 
of  the  factory  building. 


IV 

THE  ANALYSIS  AND  RECORDING  OF  TRANSACTIONS 

The  Books  of  Record  and  Account 


What  is  meant  by  an  accounting  transaction?  State  the 
essential  steps  which  must  be  taken  in  analyzing  and  recording 
a  transaction,  naming  the  principal  books  involved.  Is  it  neces- 
sary that  several  distinct  books  be  used?    Explain. 

Review  Problem  3,  Chapter  III. 

2. 

Describe  the  daybook  or  "blotter." 

The  Journai, 

3. 

Describe  the  simple  journal  in  some  detail.  What  is  the 
essential  function  of  the  journal?  What  other  purpose  does  the 
journal  usually  serve? 

4. 

(Form  B) 
Journalize  the  transactions  given  in  Problem  20    (Chapter 
III).    Name  the  accounts  and  assume  dates,  ledger  page  numbers, 
and  other  details  you  think  necessary. 

5- 

Name  several  specialized  journals. 


28  PROBLEMS  AND  EXERCISES 

6. 

(Form  B) 

Journalize  the  following  transactions.  (Use  care  in  select- 
ing the  names  of  accounts). 

[uly  2.  R.  A.  Newland  begins  business  with  a  capital  (all  in 
cash)  of  $io,ooo.  He  rents  a  store  building,  paying  3  months' 
rent  ($270)  in  advance. 

July  3.  Merchandise  is  purchased  from  Paley  &  Co.,  $3,000. 
Terms:  $1,500  cash,  and  a  60-day,  6%  note  for  the  balance. 
Store  fixtures  are  purchased  for  $500  in  cash.  Office  furniture 
is  purchased  on  account  from  N.  W.  Hart,  $200. 

July  5.  Stock  and  fixtures  are  insured  for  one  year;  prem- 
ium, $25.  Stationery  and  other  supplies  are  purchased  for  $20, 
cash.  Cash  sales  of  merchandise,  $40.  Merchandise  is  sold  on 
account  to  J.  R.  Walters,  $55. 

July  6.     Cash  is  paid  for  advertising,  $10.     Cash  sales,  $35. 

July  7.  The  clerk's  salary  is  paid,  $15.  Goods  are  bought  on 
account  from  E.  P.  Smith  Co.  to  the  amount  of  $500.  Cash  sales, 
$65.    Merchandise  is  sold  on  account  to  R.  J.  Parsons,  $28. 

July  9.    Goods  are  sold  on  account  to  F.  A.  Talbot,  $450- 

July  10.  J.  R.  Walters  returns  merchandise  to  the  amount  of 
$10  as  unsatisfactory.    His  account  is  credited. 

July  12.  Mr.  Newland  buys  the  building  and  site  he  has  been 
renting  for  $10,000.  Payment  is  made  as  follows:  cash,  $3,000; 
the  former  owner  assumes  F.  A.  Talbot's  account;  prepaid  rent 
for  2^  months  is  allowed  as  part  payment ;  a  mortgage  is  giveil 
on  building,  stock  and  fixtures  for  the  balance. 

July  13.  Mr.  Newland  withdraws  $30.0  in  cash  for  his  per- 
sonal use.  The  account  with  N,  W.  Hart  for  office  furniture  is 
paid  in  cash.  Mr.  Hart  allows  a  discount  of  2%.  (Credit  Furni- 
ture and  Fixtures.) 

July  14.  Cash  sales  for  the  week,  $350.  Sold  on  account 
to  R.  J.  Parsons,  $28.    The  clerk's  salary  is  paid,  $15. 

July  16.  Delivery  equipment  is  purchased  for  cash,  $250. 
Merchandise  is  sold  on  account  to  F.  A.  Talbot,  $60. 

July  17.    An  examination  of  the  stock  of  stationery  and  sup- 


ANALYSIS  AND  RECORDING  OF  TRANSACTIONS  29 

plies  shows  that  such  items  amounting  to  $15  have  been  con- 
sumed^ Cash  is  paid  for  additional  suppli^,  $20.  J.  R.  Walters 
pays  $25  to  apply  on  his  account. 

July  18.  R.  J.  Parsons  pays  his  account  with  cash  in  full. 
Additional  equipment  for  the  store  is  purchased  on  account  from 
N.  W.  Hart,  $105. 

July  21,  Cash  sales  for  the  week,  $380.  The  clerk's  salary 
is  paid  as  usual.  Sold  on  account  to  R.  J.  Parsons,  $28.  F.  A. 
Talbot  pays  $30  on  account. 

July  23.  Fuel  for  winter  months  is  purchased  for  cash,  $95. 
The  account  with  E.  P.  Smith  Co.  is  paid  in  full  with  cash.  Goods 
are  purchased  on  account  from  Paley  &  Co.,  $750. 

July  28.  Cash  sales  for  the  week,  $480.  Sold  on  account  to 
J.  R.  Walters,  $60;  to  R.  J.  Parsons,  $28.  The  clerk's  salary  is 
paid. 

July  31.  Mr.  Newland  buys  the  business  of  a  competitor  in 
an  adjoining  building.  He  pays  $2^^opL  cash  for  stock  and  g9od- 
will,  and  assumes  a  note  for  $500.  Goodwill  is  estimated  at  $300. 
Miscellaneous  expenses  for  the  month  are  paid  in  cash,  $75. 

The  Ledger 


Describe  the  ledger  and  the  ledger  account.  Contrast  the 
journal  and  ledger. 

Explain  the  principle  of  the  controlling  account  and  illus- 
trate. 

8. 

X,  a  merchant,  has  about  ten  trade  creditors.  In  his  ledger 
he  keeps  a  single  account,  Accounts  Payable,  and  no  individual 
accounts. 

Show  that  this  procedure  would  be  unsatisfactory;  in  other 
words  that,  while  the  controlling  account  may  perhaps  be  dis- 
pensed with  in  such  a  case,  the  individual  accounts  must  always 
be  used. 


30  PROBLEMS  AND  EXERCISES 

Journalizing 

9- 

(Form  B) 

September  i,  1921,  Charles  Spenlow  starts  a  wholesale 
hardware  business.  The  enterprise  is  small  at  first  and  the  only 
books  used  are  journal  and  general  ledger.  The  following  tran- 
sactions represent  a  month's  business.  Journalize,  assumjing 
dates. 

Charles  Spenlow  invests  $15,000  in  cash.  He  pays  $2,500 
for  equipment,  and  $6,000  for  real  estate.  Merchandise  is  pur- 
chased from  the  Wexton  Mfg.  Co.  for  $3,800  in  cash.  Sells  H.  A. 
Knox,  on  account,  merchandise  amounting  to  $500.  Unsatisfac- 
tory hardware  to  the  amount  of  $200  is  returned  to  the  Wexton 
Mfg.  Co.  Merchandise  amounting  to  $1,200  is  purchased  on 
account  from  W.  Winslow  Co.  Sells  to  H.  A,  Knox,  on  account, 
a  bill  of  goods  amounting  to  $250.  Sells  to  Rodgers  Hardware 
Co.  merchandise  on  account,  $425.  Receives  from  H.  A.  Knox, 
on  account,  $400.  Sells  to  Rodgers  Hardware  Co.  goods  amount- 
ing to  $650,  on  account.  He  pays  W.  Winslow  Co.  $450  on  ac- 
count. Rodgers  Hardware  Co.  pays  $300  on  account.  The  gen- 
eral expenses  for  the  month,  amounting  to  $440,  are  paid  in 
cash. 

10. 

(Form  B) 
S.  A.  Johnson  conducts  a  retail  shoe  store.  After  his  busi- 
ness has  been  in  operation  for  one  month  his  ledger  shows  the 
following  condition:  Equipment — debits  $680,  credits  $20; 
Cash — debits  $1,370,  credits  $400;  Merchandise — debits  $4,700, 
credits  $1,685;  Accounts  Receivable — debits  $448,  credits  $110; 
Accounts  Payable — debits  $600,  credits  $1,250;  Notes  Receiv- 
able— debits  $100,  credits  $100;  Notes  Payable — no  debits,  cred- 
its $300;  Proprietorship,  S.  A.  Johnson — debits  $125,  credits 
$4,275  ;  Salaries — debits  $60,  no  credits ;  Heat  and  Light — debits 
$12,  no  credits;  INIiscellaneous  Expense — debits  $45,  no  credits. 


ANALYSIS  AND  RECORDING  OF  TRANSACTIONS  31 

Assume  and  journalize  a  series  of  transactions  which  would 
account  for  this  situation. 

II. 

(Form  B) 

In  addition  to  the  transactions  given  in  Problem  6,  the 
assets  of  R.  A.  Newland  have  been  affected  during  the  month  of 
July  as  follows :  the  building  has  declined  in  value  since  July  12, 
$35 ;  store  fixtures  have  depreciated  $5 ;  merchandise  has  been 
damaged  and  shopworn  to  an  amount  estimated  at  $40;  of  the 
accounts  receivable  R.  J.  Parsons'  balance  is  considered  uncol- 
lectible; cash  is  missing  from  the  till,  $12. 

Journalize  these  additional  facts. 

12. 

(Form  B) 
A  buys  a  house  from  B.  The  premises  are  rented  at  $60  per 
month,  payable  semi-annually,  two  months'  rent  being  accrued  at 
date  of  purchase.  A  pays  cash,  $4,500,  and  makes  over  a  note  to 
B  drawn  against  C  for  $500,  interest  at  6%.  This  note  has  al- 
ready run  for  six  months.  Give  the  entries  on  A's  books  at  the 
time  the  house  is  purchased  and  at  the  time  the  next  semi- 
annual rent  payment  is  made. 

13- 

(Form  B) 
A  owns  a  farm,  which  represents  his  entire  capital.  On 
January  i,  191 5,  A  sells  the  farm  to  B  for  $I4,930-  He  receives 
$5,000  in  cash  and  a  mortgage  in  the  premises  for  the  balance. 
B  makes  no  payments  on  the  mortgage,  either  principal  or  interest, 
and  two  years  from  date  of  sale  A  forecloses  and  redeems  the 
farm.  The  cost  of  redemption  is  $11,000,  distributed  as  follows: 
mortgage  cancelled,  $9,930;  back  taxes,  $400;  clerical  and  other 
costs,  $670.  During  the  two  years,  A  has  been  credited  with  $280 
interest  on  his  original  bank  deposit  of  $5,000  and  its  balance. 
He  has  withdrawn  $2,000  for  living  expenses. 


32  PROBLEMS  AND  EXERCISES 

Assuming  that  this  statement  represents  A's  financial  history 
for  two  years,  and  that  the  farm  January  i,  1917,  is  worth  the 
original  selling  price,  give  journal  entries  on  A's  books  covering 
these  transactions.  What  is  A  now  worth?  Assuming  that  the 
farm  would  have  yielded  just  the  amount  of  his  living  expenses 
during  the  years  of  B's  occupancy,  what  did  A  gain  by  making 
the  sale? 

14. 

(Form  B) 

After  four  days'  operation  the  trial  balance  of  A,  a  whole- 
saler, stands  as  follows : 

Dr.  Cr. 

Purchases $3,200        $    200 

A,  Capital 3,500 

Cash    4,200  2,450 

Accounts  Payable 500  1,300 

Sales   1,200 

Notes  Receivable    100 

Accounts  Receivable    500  100 

Supplies    50 

Office  Equipment 150 

A,  Drawincr   50 


$8,750         $8,750 

Prepare  journal  entries,  in  summary  form,  which  might 
reasonably  account  for  this  condition. 

15- 

(Form  B) 

S.  D.  Lester,  a  lumber  dealer,  does  not  keep  books  by  the 
complete  double-entry  method.  At  the  beginning  of  the  second 
year's  business  his  records  show  the  assets  to  be  as  follows :  real 
estate,  $26,000;  merchandise,  $59,000;  equipment  and  supplies, 
$6,000;  accounts  and  notes  receivable,  $13,000;  cash,  $4,800.  The 


ANALYSIS  AND  RECORDING  OF  TRANSACTIONS  33 

accounts  show  mortgages  and  notes  outstanding  against  the  prop- 
erty, $36,000;  the  accounts  payable  amount  to  $12,800.  No  other 
information  is  shown  in  the  accounts. 

Prepare  a  journal  entry  which  shows  a  complete  statement 
of  assets  and  equities. 

16. 

(Form  B) 

H.  A.  Edloe  sells  some  real  estate  property  to  the  Danville 
Realty  Co.  for  $15,000.  Payment  is  made  as  follows:  cash, 
$3,000;  a  first  mortgage  in  the  property,  $10,500;  capital  stock  in 
the  International  Timber  and  Livestock  Co.,  $1,500.  Edloe  as- 
signs the  mortgage  to  a  bank,  receiving  $10,000  cash.  He  buys 
a  house  and  lot  for  $6,000,  paying  $5,000  in  cash  and  assuming 
a  mortgage  for  $1,000.  The  stock  of  the  International  T.  &  h. 
Co.  is  discovered  to  be  worthless. 

Give  journal  entries  on  Edloe's  books  covering  these  tran- 
sactions. 

17. 

(Form  B) 
Journalize  the  following  transactions: 

Feb.     I.     R.  ]\I.  Jones  invested  in  business  $2,500.00  in  cash. 

Feb.     I.     Paid  cash  for  February  rent,  $75. 

Feb.  2.  Bought  from  J.  N.  Price,  on  account,  merchan- 
dise invoiced  at  $560. 

Feb.     3.     Sold  merchandise  for  cash,  $56.50. 

Feb.  5.  Issued  our  note  for  $150,  due  in  30  days  at  6%, 
in  favor  of  J.  N.  Price,  to  be  applied  on  account. 

Feb.     6.     Sold  to  R.  B.  Rodman,  on  account,  goods  billed  at 

$73-50. 

Feb.  8.  Bought  furniture  and  fixtures,  including  glass 
showcase  for  store,  $750.     Paid  cash. 

Feb.     9.     Paid  J.  N.  Price  $125  in  cash,  on  account. 

Feb.  10.     R.  B.  Rodman  paid  $45  on  account,  in  cash. 

Feb.   II.     R.  AI.  Jones  took  $25  in  cash  to  pay  a  personal  bill. 


34  PROBLEMS  AND  EXERCISES 

Feb.  12.  Sold  to  T.  R.  Martin  merchandise,  $165.50,  for 
cash. 

Feb.   12.     Paid  cash  for  750  two-cent  stamps. 

Feb.  16.  Sold  three  glass  show  cases,  second-hand,  to  T.  J. 
Murray  for  $110.     He  paid  cash. 

Feb.  18.  Accommodated  a  friend  with  100  tw'O-cent  stamps, 
for  which  he  paid  cash. 

Feb.  19.  R.  M.  Jones  invested  $2,000  more  in  cash  in  the 
business. 

Feb.  20.  Sold  to  B.  M.  Miller,  on  account,  goods  invoiced 
at  $135. 

18. 

(Form  B) 
Journalize  the  following : 

(a)  A  and  B  form  a  partnership,  each  depositing  $5,000. 

(b)  Merchandise  is  purchased  for  cash,  $4,000. 

(c)  C  loans  the  firm  $2,000  on  a  chattel  mortgage. 

(d)  An  order  is  secured  from  D  amounting  to  $500,  freight 
to  be  paid  by  the  vendor.  The  goods  are  shipped.  Merchandise 
cost  of  the  shipment  is  $300;  preparing,  packing  and  shipping 
costs  total  $110. 

(e)  A  W'ithdraws  $200. 

(f)  A  donation  of  $100  is  made  to  a  campaign  fund. 

(g)  Supplies  for  advertising  service  are  received  from  the 
printer,  $80. 

(h)   D  pays  $200  on  account. 

(i)   A  check  is  drawn  in  favor  of  the  printer,  $80. 

(j)  The  landlord  presents  his  bill  for  the  month's  rent,  $125. 
Later  he  accepts  goods  w^ith  an  ordinary  selling  value  of  $150  in 
payment. 

(k)  The  partners  buy  the  store  and  fixtures  where  they  are 
located,  paying  cash,  $7,000,  and  giving  the  firm's  note  for  the 
balance,  $2,000.    The  fixtures  have  an  estimated  value  of  $800. 


ANALYSIS  AND  RECORDING  OF  TRANSACTIONS 


35 


19. 

(Form  B) 

A  buys  goods  of  B  for  $2,500  and  accepts  B's  draft  on  him- 
self for  the  amount.  B  discounts  the  draft  at  his  bank,  the  dis- 
count being  $5.  A  can  not  pay  at  maturity.  B's  bank  charges 
him  with  the  face  of  the  draft  phis  protest  fees  of  $2.  Some 
weeks  later  A  pays  B  the  $2,500,  interest,  $4,  accruing  since  the 
original  date  of  maturity,  and  the  amount  of  the  protest  fees. 

Journalize  on  A's  books  and  on  B's  books. 

20. 

(Form  B) 

(a)  A  owes  B  $1,200  on  open  account  for  goods  purchased. 
B  offers  A  a  discount  of  3%  for  cash.  To  secure  funds  A  dis- 
counts at  his  bank  at  a  6%  rate  a  note  which  he  holds  against  C. 
This  note  is  drawn  for  $1,152.70  for  120  days,  carries  a  6%  rate, 
and  has  60  days  yet  to  run. 

Give  journal  entries  on  A's  books  to  cover  the  discounting  of 
the  note  and  the  payment  of  B's  account. 

(b)  A  buys  goods  from  B  with  a  gross  invoice  price  of 
$1,000.  B  offers  a  discount  of  2%  for  payment  within  10  days, 
and  A  later  accepts  this  discount.  A  sells  goods  on  account  to  C 
to  the  amount  of  $500.  Terms:  1%  off  if  paid  in  20  days.  C 
later  takes  the  discount. 

Journalize  on  A's  books. 

21. 

A  sum  of  $250  received  from  a  customer  on  account  is  journ- 
alized and  entered  as  a  cash  sale.  Give  journal  entries  which 
would  correct  this  error. 

22. 

(Form  B) 

Journalize  the  following  transactions  taken  from  the  finan- 
cial history  of  J.  Blair,  a  retailer: 


36  PROBLEMS  AND  EXERCISES 

Jan.  2.  Goods  are  bought  on  account  from  M.  D.  Atkins, 
$400 ;  a  month's  rent  is  paid,  $40 ;  merchandise  is  sold  on  account 
to  A.  Snow,  $15,  and  to  B.  Cole,  $20;  supplies  are  purchased  for 
$40,  cash. 

Jan.  3.  Goods  are  bought  on  account  from  Baptros  Whole- 
sale Co.,  $700 ;  cash  sales  for  the  day,  $65 ;  sales  on  account  to  B. 
Cole,  $10. 

Jan.  4.  Cash  is  paid  for  stationery,  $5  ;  cash  sales  total  $70 ; 
advertising  bill  is  paid,  $10. 

Jan.  5.  Goods  are  sold  on  account  to  S.  Sherman,  $15;  A. 
Snow  pays  his  bill  of  the  2nd;  check  for  $10  is  mailed  to  the 
Baptros  Wholesale  Co.  on  account;  cash  sales,  $100;  donation  to 
foreign  relief,  $10;  $400  is  borrowed  from  the  Y.  Bank  on  a  30- 
day  note  at  7% ;  M.  D.  Atkins'  account  of  the  2nd  is  paid,  a  dis- 
count of  2%  being  secured. 

Jan,  6,     Wages  are  paid,  $30 ;  cash  sales,  $90. 

23- 

(Form  B) 
Journalize  the  following,  showing  account  titles  and  amounts, 
but  omitting  details : 

(a)  X,  a  proprietor,  turns  over  to  the  business  a  car  worth 
$1,200. 

(b)  The  firm  borrows  $1,000  from  the  X  bank  on  its  promis- 
sory note. 

(c)  The  management  decides  that  the  accrued  depreciation 
of  equipment  for  the  year  is  $2,000. 

(d)  Real  estate  is  purchased  for  cash,  $5,000. 

(e)  X  withdraws  $500  in  cash  and  merchandise  with  a  sell- 
ing price  of  $65  and  a  cost  value  of  $50. 

(f)  A,  a  customer,  pays  his  account,  $200. 

(g)  Product  is  sold  to  B,  on  account,  $100. 

(h)  The  net  profits  for  the  year;  $5,000,  are  apportioned 
equally  between  the  two  owners,  X  and  Y ;  each  partner  withdrew 
$2,000  in  cash. 


ANALYSIS  AND  RECORDING  OF  TRANSACTIONS         37 

(i)  Materials  are  purchased  on  account  from  the  A.  B. 
Company,  $1,500. 

(j)  The  account  incurred  under  (i)  is  paid,  a  2%  discount 
being  allowed  the  firm. 

(k)  Interest  to  the  amount  of  $100  has  accrued  on  mort- 
gages payable. 

(1)   The  shop  foreman  requisitions  materials  amounting  to 

$200  from  the  storeroom. 

(m)   On  a  special  Saturday  sale  merchandise  which  cost  $500 

is  sold  for  $450- 

(n)  On  October  i,  the  firm  receives  a  bill  for  $15  from  the 
telephone  company  covering  service  for  the  quarter,  October  to 
December. 

(o)   Coal  burned  amounts  to  $100. 

(p)  Materials  are  returned  to  the  A.  B.  Company  as  unsatis- 
factory, $100. 

(q)  The  firm  takes  up  the  note  mentioned  under  (b),  pay- 
ing $500  cash  and  giving  a  new  note  for  $505. 

(r)   Insurance  expired  amounts  to  $80. 

(s)  B  pays  the  account  mentioned  under  (g)  by  furnishing 
services  as  a  salesman. 

(t)  The  firm  buys  a  machine  on  account;  the  invoice  price 
is  $800;  freight  charges  thereon  amounting  to  $40  are  paid  in 
cash;  cost  of  installation  (wages  of  workmen  temporarily  de- 
tached from  the  regular  operating  staflf,  and  which  will  not  be  paid 
for  two  weeks),  $20. 

24. 

(Form  B) 
On  June  i  A  sells  a  shipment  of  goods  to  B  on  account. 
The  gross  price  is  $1,000,  subject  to  a  discount  of  2%  if  paid  in 
10  days.  On  June  10  B  pays  $500  on  account  and  gives  A  his 
one-year,  6%  note  for  $200,  dated  June  i.  B  claims  a  discount  of 
2%  on  his  cash  payment  and  A  agrees  to  allow  it.  On  June  30 
a  memorandum  is  received  from  B  claiming  a  rebate  of  $50  be- 
cause of  unsatisfactory  goods  included  in  the  shipment.     A  in- 


38.  PROBLEMS  AND  EXERCISES 

vestigates  and  agrees  to  accept  the  return  of  goods  with  a  gross 
seUing  vakie  of  $ioo  (and  a  cost — to  A — value  of  $75)  and  to 
settle  the  balance  of  the  account  for  $180,  cash.  B  agrees,  re- 
turning the  goods  and  sending  his  check  for  $180.  On  Oct.  i 
A  discounts  B's  note  at  a  6%  rate. 

Give  journal  entries  covering  the  foregoing  on  A's  books. 

Posting 

25- 

In  what  does  the  process  of  posting  consist? 

26. 

(Form  C) 
Open  the  necessary  ledger  accounts  and  post  the  transac- 
tions given  in  Problem  6  above.     Do  not  use  any  controlling  ac- 
counts. 

27. 

(Form  C) 
Open  appropriate  ledger  accounts  and  post  the  entries  made 
in  working  Exercises  9  and  15. 

28. 

(Form  C) 
Open  appropriate  ledger  accounts  and  post  the  entries  made 
in  Exercise  17. 

29. 

H.  I.  Oldey  begins  business  on  January  i  as  a  grain  buyer, 
investing  $4,000.  During  the  month  he  buys  a  horse  and  rig  at  a 
cost  of  $300,  cash;  his  purchases  of  oats  total  $1,200,  of  wheat, 
$3,000,  and  of  other  grains,  $500;  all  purchases  of  grain  are  for 
cash  except  one  lot  from  W.  Flickner  to  the  amount  of  $700,  Mr. 


ANALYSIS  AND  RECORDING  OF  TRANSACTIONS 


39 


Oldey  in  this  case  giving  Mr.  Flickner  his  6o-day  note  at  6%  for 
$500  and  agreeing  to  pay  the  balance  in  cash  on  Feb.  5 ;  sales 
of  wheat  to  the  X  Commission  Company  total  $3,500,  of  oats 
$1,100,  and  of  other  grains  $700;  cash  receipts  from  the  X  Com- 
mission Company  on  account  total  $3,800;  oats  to  the  amount  of 
$10  (cost  value)  are  used  for  horse  feed;  freight  charges  on  out- 
going shipments  amount  to  $300,  of  which  amount  $50  is  still  un- 
paid ;  expenditures  for  miscellaneous  business  items  total  $20. 

(a)  Prepare  journal  entries  (Form  B)  covering  the  above, 
showing  account  titles,  amounts,  and  brief  explanations. 

(b)  Open  appropriate  accounts  (Form  C)  and  post. 

(c)  Take  a  trial  balance.^     (Form  B). 

(d)  Show  precisely  why  no  reliable  conclusion  concerning 
the  financial  status  of  Mr.  Oldey's  grain  business  at  the  end  of 
January,  or  of  the  success  of  operations  during  the  month,  can  be 
drawn  from  the  above  data. 

30. 

Present  trial  balances  covering  the  ledger  accounts  which 
you  have  prepared  from  transactions  given  in  Exercises  6,  9  and 
17,  respectively. 


^Since  the  trial  balance  has  not  been  explained  in  the  text  up  to  this 
point,  a  brief  oral  explanation  of  this  device  should  now  be  made  by  the 
instructor. 


V 

DEVELOPMENTS  IN  TECHNIQUE 

I. 

What  is  the  primary  purpose  of  the  special-cohimn  device  in 
bookkeeping?  What  additional  purpose  is  served  by  the  use  of 
subsidiary  journals  and  ledgers? 

The  Special  Column  Journal 

2. 

(Form  C) 

Open  the  necessary  ledger  accounts  to  record  the  entries 
shown  in  the  illustration  on  pages  78-80  of  the  text.  Make  all 
the  postings  to  the  ledger  which  are  indicated  in  the  illustration. 
Check  the  customers'  and  creditors'  ledgers  with  the  proper  con- 
trolling accounts  in  the  general  ledger. 


(Form  D) 

Enter  the  following  transactions  in  a  special-column  journal. 
Adopt  the  same  column  headings  as  are  used  in  the  illustration 
on  pages  78-80  of  the  text-book,  as  these  transactions  are  a  con- 
tinuation of  that  illustration. 

Feb.  I.  Cash  sales  for  the  day  amount  to  $285.  Merchandise 
amounting  to  $1,500  is  purchased  from  the  Crane  Company; 
terms,  2/10  n/30. 

Feb.  2.  The  bill  of  the  Crane  Co.  dated  Jan.  2,  amounting 
to  $3,000,  is  paid;  a  discount  of  1%  is  allowed.  Sales  on  account 
are  as  follows:  J.  R.  Kerwin,  $150;  George  Otto,  $75;  John 
Quincy,  $95. 


DEVELOPMENTS  IN  TECHNIQUE  41 

Feb.  3.  A  payment  of  $500  is  made  to  a  local  attorney  for 
services  incident  to  transferring  some  property.  Cash  sales  for 
the  day  are  $395. 

Feb.  4.  A  bill  of  goods  amounting  to  $500  is  purchased  from 
the  Brainerd  Mfg.  Co.;  terms  2/12  n/30. 

Feb.  5.  The  bill  of  the  Brainerd  Mfg.  Co.  for  $450,  dated 
Tan.  II,  is  paid.  A  discount  of  1%  is  taken.  Cash  sales  for  the 
day  are  $275. 

Feb.  6.  The  cash  sales  amount  to  $60.  Sales  on  account :  to 
N.  B.  Lawrence,  $10;  to  R.  N.  Martin,  $25.  The  salaries  for  the 
week  amounting  to  $250  are  paid.  The  invoice  of  the  Cutlery 
Company  amounting  to  $300,  dated  Jan.  6,  is  paid. 

Feb.  8.  Insurance  premiums  on  the  property  are  paid  as 
follows:  building,  $150  for  3  years;  furniture  and  fixtures,  $15 
for  one  year;  merchandise  stock,  $90  for  one  year.  Cash  sales 
amount  to  $80. 

Feb.  9.  Cash  sales  for  the  day  amount  to  $195.  The  credit 
sales  :  J.  R.  Kerwin,  $25  ;  R.  M.  Martin,  $30;  and  N.  B.  Lawrence, 
$45.    A  new  display  case  is  purchased  for  $75. 

Feb.  10.  A  new  garage  is  built  for  the  business  by  the  Bur- 
ton Construction  Co.  at  a  cost  of  $500.  This  is  paid  in  cash. 
Cash  sales  for  the  day  amount  to  $240.  The  credit  sales :  George 
Otto,  $50;  John  Quincy,  $75. 

Feb.  II.  The  cash  sales  are  $105.  The  bill  of  the  Crane  Co. 
dated  Feb.  i  is  paid.    Deduct  2%  for  discount. 

Feb.  12.  Cash  sales  for  the  day  amount  to  $450.  Charge 
sales:  J.  R.  Kerwin,  $75;  R.  M.  Martin,  $40;  John  Quincy,  $75. 
A  delivery  car  is  purchased  for  $750. 

F*eb.  13.  Cash  sales  amount  to  $350.  A  bill  of  goods  is 
purchased  from  the  Brainerd  Mfg.  Co.  amounting  to  $450;  terms, 
2/10  n/30.     Clerks'  salaries  amounting  to  $275  are  paid. 

Feb.  15.  Gasoline  and  oil  for  auto  were  purchased  today  for 
$45.  J.  R.  Kerwin  paid  $175  on  account.  The  cash  sales  amount 
to  $225.  The  sum  of  $1,000  is  borrowed  from  the  bank  on  a  60- 
day  6%  note. 

Feb.  16.  The  cash  sales  amount  to  $250.  The  credit  sales: 
George  Otto,  $50;  John  Quincy,  $25.  Bill  of  Brainerd  Mfg. 
Co.  dated  Feb.  4,  and  amounting  to  $500,  is  paid,  less  2%. 


42  PROBLEMS  AND  EXERCISES 

Feb.  17.  Advertising  space  in  the  local  paper  is  paid  for  in 
cash,  $75.  Merchandise  amounting  to  $1,500  is  purchased  from 
Artland  Alfg.  Co. ;  terms  2/10  n/30.  Cash  sales  are  $200.  Credit 
sales:     J.  R.  Kerwin,  $75;  R.  M.  Martin,  $150. 

Feb.  18.  The  cash  sales  are  $350.  Geo.  Otto  pays  $100  on 
account. 

Feb.  19.  jMerchandise  purchased  from  the  Cutlery  Company 
amounts  to  $500;  terms,  2/10  n/30.  John  Quincy  pays  $200  on 
account.     Cash  sales  amount  to  $275. 

Feb.  20.  The  cash  sales  amount  to  $175.  Salaries  for  the 
week  amounting  to  S300  are  paid.  Office  supplies  amounting  to 
$60  are  purchased  for  cash. 

Feb.  22.     The  cash  sales  amount  to  $195. 

Feb.  23.  The  bill  of  the  Brainerd  Mfg.  C,  dated  Jan.  31st, 
amounting  to  $275  is  paid  in  cash — no  discount.  Cash  sales 
amount  to  $150.    Received  $95  from  R.  M.  Martin  on  account. 

Feb.  24.  Cash  sales  amount  to  $100.  Credit  sales:  George 
Otto,  $75 ;  J.  R.  Kerwin,  $50 ;  R.  M.  Martin,  $50. 

Feb.  25.     A  payment  of  $25  is  made  for  advertising. 

Feb.  26.  Freight  bills  to  date  amounting  to  $150  are  paid. 
Cash  sales  amount  to  $215. 

Feb.  27.  Cash  sales  amount  to  $200.  Salaries  for  the  week. 
$325,  are  paid.  Supplies  for  the  delivery  car,  $25,  are  purchased 
for  cash.  A  payment  of  $10  is  made  for  advertising.  The  tele- 
phone bill,  $4,  is  paid.  The  electric  light  bill,  $5,  is  paid.  Coal 
is  purchased  for  cash,  $75. 


(Form  C) 

Post  the  entries  from  the  special-column  journal  of  the  pre- 
ceding problem,  using  the  same  ledger  accounts  which  were  used 
for  Problem  2.  How  many  postings  were  saved  by  the  use  of 
the  special-column  journal  over  the  number  which  would  have 
been  required  had  the  simple  type  of  journal  been  used?  Pre- 
pare a  trial  balance. 

Suggest  a  way  in  which  the  entries  made  in  the  special-column 
journal  of  Exercise  3  could  be  placed  on  fewer  lines  than  are 
required  by  the  standard  form  of  entry. 


DEVELOPMENTS  IN  TECHNIQUE  43 

5- 

Show  how,  by  juxtaposing  the  debit  and  credit  columns 
applicable  to  each  account,  a  special-column  journal  might  be 
made  into  a  combination  journal  and  ledger,  in  which  journaliz- 
ing and  posting  would  be  simultaneously  accomplished  in  one 
operation. 

6. 

(Form  D) 
Enter  the  following  transactions  in  a  special-column  journal. 
(FormD). 

Oct.  I.  J.  B.  Preston,  proprietor,  invested  in  business  $5,000 
in  cash. 

Oct.   r.     Paid  rent  for  October  in  cash,  $70. 

Oct.  2.  Sold  to  Jno.  R.  Thompson,  on  account,  bill  of  goods 
for  $65.50, 

Oct.  2.  Bought  merchandise  from  the  Sterling  Furniture 
Co.,  for  cash,  $276.60. 

Oct.  3.  Sold  merchandise  to  Gus  E.  Ericson,  on  account, 
$47-50. 

Oct.  4.  Bought  merchandise  for  cash.  Palmer  &  Anderson's 
invoice,  $364.20. 

Oct.  5.  Received  cash  from  Jno.  R.  Thompson,  on  account, 
$50. 

Oct.  6.  Sold  to  Harry  K.  Feldman,  on  his  lo-day  note  at 
6%,  merchandise,  $126.50. 

Oct.  6.  Paid  the  bookkeeper's  salary  for  the  week  ending 
today  in  cash,  $18. 

Oct.  8.  J.  B.  Preston  withdrew  for  his  personal  use  S25.  in 
cash. 

Oct.  9.  Sold  to  Geo.  W.  Chambers,  on  account,  $123.75 
worth  of  merchandise. 

Oct.  10.  Received  cash  from  Gus  E.  Ericson,  on  account, 
$25. 

Oct.  II.  Sold  merchandise  to  Jno.  R.  Thompson,  on  account, 
$98.50. 

Oct.   13.     Paid  the  bookkeeper's  salary  in  cash,  as  on  Oct.  6. 


44  PROBLEMS  AND  EXERCISES 

Oct.  1 6.  Received  from  Harry  K.  Feldman  his  check  for 
:$i26.yi  to  redeem  his  note  of  Oct.  6,  $126.50,  and  interest  for  10 
days  at  6%,  $.21. 

Oct.  17.  Sold  to  Gus  E.  Ericson,  on  account,  merchandise, 
$76.75. 

Oct.  18.  T'aid  for  office  stationery  and  envelopes  in  cash, 
$7.80. 

Oct.  19.  Sold  to  Geo.  W.  Chambers,  on  account,  merchan- 
dise, S32.25. 

Oct.  IQ.  Received  cash  from  Jno.  R.  Thompson,  to  apply  on 
account,  $15.50. 

Oct.  19.  Bought  merchandise  for  cash  from  the  Hoffman 
Co.,  their  invoice,  $225.60. 

Oct.  20.     Paid  the  bookkeeper's  salary  in  cash,  as  on  Oct.  6. 

Oct.  22.  Sold  to  F.  N.  Wright  on  his  30-day  note  at  6%,  bill 
of  goods,  $150.65. 

Oct.  24.  Sold  to  Jno.  R.  Thompson,  on  account,  $137.75, 
merchandise. 

Oct.  25.  Received  from  Gus.  E.  Ericson  cash  to  complete 
the  payment  of  bill  against  him  of  Oct.  3,  $22.50. 

Thk  Cash  Book 


Rule  up  receipts  and  disbursements  sides,  respectively,  of  a 
cash  book  suitable  for  a  retail  business,  and  enter  at  least  two 
illustrations  on  each  side.  Select  column  headings  carefully  and 
indicate  debit  and  credit  colums  with  the  appropriate  signs. 

8. 

(a)  "Alost  of  the  columns  on  the  so-called  "debit"  side  of 
the  cash  book  are  credit  columns ;  and  on  the  "credit"'  side  we  find 
debit  columns."     Explain. 

(b)  Show  that  the  "cash"  columns  may  be  omitted  from 


DEVELOPMENTS  IN  TECHNIQUE  45 

the  cash  book  entirely  and  that  the  book  may  yet  be  used  as  a 
cash  account. 

(c)   Show  that  in  some  cases  it  might  be  expedient  to  have 
hvo  cash  books,  a  separate  vohime  for  each  side. 


In  some  cash  books  the  "purchase  discount''  column  is  found 
on  the  receipts  side  and  the  "sales  discount''  column  on  the  dis- 
bursements side.  Show,  with  illustrations,  how  entries  would  be 
made  according  to  this  scheme.  Argue  that  the  arrangement 
shown  in  the  textbook  is  more  rational  and  efficient.  If  there 
were  no  discount  columns  in  the  cash  book  how  would  cash  pay- 
ments or  receipts  involving  discounts  be  recorded  ? 

The  Sales  Book 

10. 

"If  all  sales  are  entered  in  a  sales  book  and  all  receipts  in  a 
cash  book  certain  data  will  be  shown  in  these  journals  in  dupli- 
cate." Explain  what  is  meant  and  state  how  posting  would  be 
accomplished  in  such  a  case.  Show  that  it  is  feasible  to  avoid 
such  a  duplication. 

II. 

"The  simplest  sales  book  has  only  one  column  for  amounts." 
Give  an  illustration  of  a  single-column  sales  book  and  show  ex- 
actly how  posting  from  such  a  book  would  be  accomplished. 

12. 

The  Wheeler  Tool  Works  manufactures  three  kinds  of  ma- 
chine tools,  designated  by  the  symbols  X,  Y,  and  Z,  and  sells  to 
only  four  customers.  A,  B,  C,  and  D.    All  sales  are  on  account. 

Show  an  outline  of  a  sales  book  especially  suitable  for  this 
situation.  Enter  at  least  two  illustrative  transactions ;  and  state 
exactly  how  posting  from  this  book  would  be  accomplished. 


46  PROBLEMS  AND  EXERCISES 

The  Purchase  Book 

13- 

The  X  Company  does  a  wholesale  and  retail  business  in  motor 
oils  and  gasoline.  It  buys  all  its  oils  from  one  manufacturer,  the 
Y  Company,  and  all  its  gasoline  from  the  Z  Company.  There  are 
no  cash  purchases.  Assuming  that  the  X  Company  wishes  to 
know,  as  far  as  possible,  the  profit  made  on  each  class  of  busi- 
ness, outline  a  suitable  purchase  journal  for  the  Company,  and 
enter  at  least  two  illustrative  transactions.  Show  exactly  how 
posting  from  this  book  would  be  accomplished  and  state  why  the 
scheme  you  have  prepared  is  preferable  to  the  use  of  the  simple 
journal  to  record  these  purchase  transactions. 

14. 

The  Allison-Smead  Co.  buys  materials  exclusively  from 
three  houses,  the  XL  Supply  Co.,  Harrey  and  Roach,  and  South- 
ern Mfg.  Co.  Materials  are  acquired  from  these  concerns  in 
small  lots  and  at  frequent  intervals,  several  shipments  being  re- 
ceived from  each  source  every  month.  All  purchases  are  on  ac- 
count. 

Construct  a  purchase  book  suited  to  the  needs  of  the  Allison- 
Smead  Co.,  working  out  a  device  which  will  obviate  the  necessit) 
for  individual  postings  to  the  creditors'  accounts. 

The  Vouchers  Payable  Register 

15. 

"The  purchase  book,  so-called,  is  commonly  used  as  a  journal' 
izing  medium  for  transactions  covering  the  purchase  of  the  prin- 
cipal raw  materials  and  merchandise  stocks  only.  The  vouchers 
payable  register,  on  the  other  hand,  is  a  journal  which  embraces  a 
record  of  all  acquisitions,  on  a  credit  basis,  of  structures,  com- 
modities, and  services." 

Show   that   this   is  the   case,    ruling  up,    for   illustration,   a 


DEVELOPMENTS  IN  TECHNIQUE  47 

vouchers   payable   register   suitable   for  a   small   manufacturing 
corporation  and  showing  how  such  a  book  would  be  used. 

16. 

Construct  a  cash  book  suited  to  accompany  the  register  which 
you  prepared  in  Problem  15,  and  explain  its  use.  What  additional 
journals  might  be  used  in  connection  with  these  books? 


Specialized  Ledgers 

17- 

In  a  particular  office  you  find  books  of  account  with  titles  as 
follows  :  General  Ledger ;  Operating  Ledger ;  Promissory  Notes ; 
Customers;  Creditors;  Stores  Ledger;  Equipment  Ledger;  Se- 
curities Ledger. 

State  what  you  would  expect  to  find  in  each  book. 

18. 

Describe  methods  by  which  the  task  of  posting  to  the  indi- 
vidual customers'  and  creditors'  accounts  can  be  practically  elim- 
inated. 

Miscellaneous 

19. 

On  July  14,  192 1,  the  general  ledger  of  the  Weedmer  Auto 
Co.  showed  the  following  condition  :  Real  Estate — debits  $8,000 ; 
Garage  Building — debits  $6,000;  Warehouse — debits  $3,000; 
Garage  Fixtures — debits  $2,000;  Office  Furniture — debits  $400; 
Stationery  and  Supplies — debits  $125;  Cars — debits  $32,600; 
Car  Sales — credits  $16,800;  Motorcycles — debits  $2,100;  Motor- 
cycle Sales — credits  $1,050;  Tools — debits  $600;  Parts — debits 
$4,800;  Part  Sales — credits  $1,250;  Gasoline  and  Oil — debits 
$2,200,  credits  $1,600;  Repair  Service — credits  $1,400;  Shop 
Expense — debits    $600;    Labor — debits    $600;    Capital    Stock — 


48  PROBLEMS  AND  EXERCISES 

credits  $35,000;  Fuel — debits  $200;  Surplus — credits  $3,200;  Ac- 
counts Receivable — debits  $4,600,  credits  $1,700;  Accounts  Pay- 
able— debits  $1,700,  credits  $5,800;  Rent — no  entries;  General 
Expense — debits  $100;  Interest — no  entries;  Cash — debits  $4,450, 
credits — $1,050;  Notes  Receivable — debits  $6,200,  credits  $800; 
Notes  Payable — debits  $1,900,  credits  $12,525. 

Open  these  accounts  and  enter  the  amounts  given.     (Form 

The  controlling  account,  Accounts  Receivable,  shows  total 
debits  $4,600,  and  total  credits  $1,700.  The  specific  accounts  that 
make  up  this  amount  are  as  follows:  J.  R.  Ringoen — debits 
$130,  credits  $100;  W.  S.  Ilalverson — debits  $232,  credits  $100; 
George  Herter — debits  $265,  credits  $100;  E.  H.  Adams — debits 
$390,  credits  $145;  W.  A.  P>enitt — debits  $168,  credits  $45;  C. 
T.  Bremecker — debits  $275,  credits  $105;  J.  N.  Perkins — debits 
$395,  credits  $190;  H.  J.  Gee— debits  $65,  credits  $10;  Addi- 
son Grocery-  Co. — debits  $580,  credits  $170,  H.  J.  Neils — debits 
$350,  credits  $100;  E.  A.  Taylor— debits  $64;  G.  E.  McCune— 
debits  $145,  credits  $50;  I.  S.  Goldberg — debits  $615,  credits 
$380;  P.  A.  Cook— debits  $490,  credits  $205;  E.  E.  Erickson— 
debits  $100;  L.  H.  Ickler— debits  $115;  G.  P.  Meurer — debits 
$221. 

Open  a  customers'  ledger  showing  the  accounts  and  amounts 
given  above.     (Form  C). 

Accounts  Payable  in  the  same  problem  shows  a  debit  total 
of  $1,700,  and  credits  of  $5,800.  These  amounts  are  made  up  of 
the  following  specific  accounts:  Simplex  Auto  Co. — debits  $1,000, 
credits  $3,500;  Randier  Cycle  Co.— debits  $350,  credits  $1,100; 
Baker  Auto  Supply  Co. — debits  $300,  credits  $650;  Puritan  Oil 
Co. — debits  $50,  credits  $550. 

Open  a  creditors'  ledger  showing  the  accounts  and  amounts 
given  above.     (Form  C). 

For  the  cash  book,  use  Form  E  for  the  debit  side  with  special 
columns  as  follows :  Cash,  Accounts  Receivable,  Notes  Receiv- 
able, Interest,  Repair  Service,  Gasoline  and  Oil,  Parts,  Cars, 
Motorcycles.  On  the  credit  side  (Form  F)  use  the  following 
special  columns :  Cash,  Labor,  Stationery  and  Supplies,  Accounts 


DEVELOPMENTS  IN  TECHNIQUE  49 

Payable,  Notes  Payable,  General  Expense.  Reserve  one  column 
on  each  side  for  sundry  items.  In  this  case  the  cash  book  is  not 
to  be  used  as  the  Cash  account. 

In  the  purchase  book  (Form  F)  open  special  debit  columns 
for  Parts,  Alotorcycles,  Cars,  and  Gasoline  and  Oil;  and  credit 
columns  for  Accounts  Payable,  and  Notes  Payable. 

In  the  sales  book  use  credit  columns  for  Part  Sales,  IMotor- 
cycle  Sales,  Car  Sales,  Gasoline  and  Oil;  and  debit  columns  for 
Accounts  Receivable,  Notes  Receivable,  and  Cash.     (Form  F). 

Prepare  a  trial  balance  to  prove  your  work  thus  far. 

Using  the  above  described  books — in  addition  to  the  general 
ledger  (Form  C)  and  a  general  journal  (Form  B)  for  miscellane- 
ous transactions — enter  the  following  transactions,  and  post  to 
the  proper  accounts.  In  this  case  enter  the  cash  sales  in  the 
sales  book  as  well  as  the  cash  book.  This  is  often  done  so  that 
the  sales  book  at  any  time  gives  total  sales  of  merchandise,  both 
cash  and  credit.  Post  cash  only  from  the  cash  book  and  sales 
only  from  the  sales  book. 

July  16.  Sold  gasoline  and  oil:  for  cash,  $47;  on  account  to 
J.  N.  Perkins,  $2.  Paid  on  account  to  the  Simplex  Auto  Co., 
$1,500.  Received  on  account:  from  George  Herter,  $40;  from  E. 
H.  Adams,  $57;  from  W.  A.  Benitt,  $52.  Sold  parts:  for  cash, 
$16;  on  account  to  C.  T.  Bremecker,  $28.  Repair  work :  for  cash, 
$76;  on  account  to  J.  N.  Perkins,  $16. 

July  17.  Sold  Simplex  chummy  roadster  to  P.  A.  Cook  for 
$1,200,  cash.  An  extra  repair  man,  G.  A.  Donald,  is  hired  at 
$20  per  week.  Sold  gasoline  and  oil :  for  cash,  $22 ;  on  account 
to  George  Herter,  $4,  to  H.  J.  Gee,  $3.  Received  for  repair  ser- 
vice, $18. 

July  18.  Notice  was  received  that  4  Simplex  touring  cars 
have  arrived  at  the  AI.  C.  depot  consigned  to  the  firm.  I.  S.  Gold- 
berg paid  his  note  of  April  18,  $1,200,  and  interest,  $18.  Bought, 
on  account,  6  motorcycles  from  the  Randier  Cycle  Co.,  $400. 
Received  on  account  from  W.  S.  Halverson,  $32.  It  was  discov- 
ered that  the  charge  for  repair  work  to  J.  N.  Perkins  on  July  16 
was  an  error,  as  Mr.  Perkins  paid  cash  in  full  for  the  bill  of  that 


50  PROBLEMS  AND  EXERCISES 

date.  Assuming  the  entry  has  been  posted,  make  a  correcting 
journal  entry. 

July  19.  Sold  2  Randier  motorcycles  for  cash,  $300.  Sold 
Simplex  touring  car  to  O.  H.  Hanft  for  $1,500.  Terms:  $500 
cash,  and  a  6%,  60-day  note  for  the  balance.  Paid  the  note  to 
Randier  Cycle  Co.,  dated  May  19,  for  $500;  interest  $!i. 

July  20.  Advanced  $25  to  E.  A.  Raymond,  foreman.  Paid 
for  advertising,  $20.  Leased  space  in  w^arehouse  to  Jackson 
Hardware  Co.;  a  month's  rent,  $60,  was  paid  in  advance.  The 
lease  was  dated  Aug.  i. 

July  21.  Sales  of  gasoline  and  oil  since  July  17:  for  cash, 
$130;  on  account  to  Addison  Grocery  Co.,  $8.  Sales  of  parts: 
for  cash,  $116;  on  account  to  Addison  Grocery  Co.,  $41.  Re- 
ceived cash  for  repair  service  for  last  four  days,  $197.  Repair 
service  on  account:  to  W.  A.  Benitt,  $6;  to  George  Herter,  $12; 
to  Addison  Grocery  Co.,  $26.  Payroll  for  the  week  (not  includ- 
ing the  advance  to  Raymond),  $270.  Paid  to  Simplex  Auto  Co., 
$400  on  account.  Sold  Simplex  touring  car  to  G.  P.  Meurer  for 
cash,  $1,150.  Sold  a  chummy  roadster  to  H.  J.  Neils  for  $1,200. 
Terms:  cash  $1,000;  balance  on  account. 

July  23.  Purchased  stationery,  $25.  Bought  3  tons  coal  for 
cash,  $30.  Bought  new  tools  from  Baker  Auto  Supply  Co.  for 
cash,  $120.    Received  on  account  from  E.  H.  Adams,  $25. 

July  24.  Freight  bills  were  paid,  $82.  G.  E.  McCune  paid 
his  note  for  $200,  dated  June  24,  and  interest,  $1. 

July  25.  Sold  one  Randier  motorcycle  to  J\I.  D.  Way  for 
$160.  Terms :  cash,  $25 ;  a  non-interest  bearing  60-day  note  for 
the  balance.  Arrangements  have  been  made  with  the  Simplex 
Auto  Co.  for  the  exchange  of  $6,000  of  notes  due  today  for 
capital  stock  in  the  firm  of  the  same  amount.  The  capital  stock 
was  issued  and  the  notes  cancelled.  Accrued  interest  on  the 
notes,  $360,  was  paid  in  cash. 

July  26.  Paid  for  advertising,  $25.  Paid  freight  bill,  ^22. 
Received  on  account  from  E.  A.  Taylor,  $64. 

July  27.     Sold  Simplex  delivery  car  to  the  Addison  Grocery 


DEVELOPMENTS  IN  TECHNIQUE  51 

Co.  for  $r,  300.    Terms :  $300  in  cash,  and  a  30-day,  non-interest 
bearing  note  for  the  balance. 

July  28.  Repair  service  for  the  week  amounted  to  $260,  cash. 
Repair  service  on  account  as  follows:  G.  P.  Meurer,  $4;  E.  H. 
Adams,  $12;  George  Herter,  $90;  G.  E.  McCune,  $44.  Cash 
sales  of  gasoline  and  oil  for  the  week  amounted  to  $200.  Sales 
of  gas  and  oil  on  account  as  follows:  Addison  Grocery  Co.,  $7; 
W.  A.  Benitt,  $4;  J.  N.  Perkins,  $8.  Cash  sales  of  parts,  $69. 
Parts  were  sold  on  account  to  L.  H.  Ickler,  $45.  Payroll  for  the 
week,  $295.  Donated  $10  cash  to  the  Red  Cross.  Bought  gaso- 
line and  oil  from  the  Puritan  Oil  Co.  on  account,  $400.  Some 
new  lighting  fixtures  were  installed  in  the  garage;  cost,  $50  cash. 
Received  on  account:  from  H.  J.  Gee,  $6;  from  P.  A.  Cook,  $30; 
from  I.  S.  Goldberg,  $17;  from  E.  E.  Erickson,  $50.  Sold  one 
second-hand  Randier  motorcycle,  $100. 

July  30.    Received  from  J.  N.  Perkins,  on  account,  $125. 

July  31.  Cash  sales  of  gas  and  oil  for  2  days,  $46.  Repair 
service :  for  cash,  $47 ;  on  account  to  Addison  Grocery  Co.,  %2j. 
Received  on  account  from  Addison  Grocery  Co.,  $25.  Paid  on 
account:  to  Baker  Auto  Supply  Co.,  $140;  to  Simplex  Auto  Co., 
$500;  to  Puritan  Oil  Co.,  $100.  Cash  sales  of  parts,  $14.  Bought 
2  Simplex  touring  cars  on  account  for  $2,000.  The  store  clerk 
reports  that  parts  to  the  amount  of  $100  have  been  used  in  re- 
pair work.  (Charge  Shop  Expense.)  It  is  estimated  that  the 
assets  have  declined  in  value  as  follows:  tools,  $40  (charge  Shop 
Expense)  ;  garage  building,  $50  (charge  General  Expense)  ; 
warehouse,  $30;  office  furniture,  $5 ;  stationery  and  supphes,  $50; 
fuel,  $20;  motorcycles,  $10.  Of  the  accounts  receivable,  J.  R. 
Ringoen's  balance,  $30,  is  considered  uncollectible.  Paid  light 
bill,  $12;  telephone  bill,  $6. 

20. 

Outline  what  you  consider  to  be  an  adequate  system  of  finan- 
cial records  for  some  business  enterprise  with  which  you  are 
familiar.  Rule  the  various  forms;  write  in  the  necessary  head- 
ings ;  and  enter  and  post  illustrative  transactions. 


VI 

THE  ASSET  ACCOUNTS 
Account  with  Fixed  Tangible  Assets 

I. 

Distinguish  between  tangible  and  intangible  assets.  Com- 
ment on  the  following  definition : 

"Any  value  which  inheres  in  a  business  enterprise  in  its  en- 
tirety, but  which  has  no  specific  physical  residence,  constitutes  an 
intangible  asset." 

2. 

State  the  three  fundamental  situations  which  may  require 
debits  in  the  fixed  tangible  asset  accounts.  What  are  the  two 
principal  situations  requiring  credit  entries  in  such  accounts? 


Name  and  explain  the  principal  factors  contributing  to  the 
depreciation  of  fixed  tangible  assets. 

4. 

(Form  B) 

Explain  the  use  of  valuation  accounts  to  show  the  deprecia- 
tion of  fixed  tangible  assets.  Give  illustrative  entries  to  show  how 
account  is  kept  of  fixed  property  (a)  when  an  item  is  purchased; 
(b)  when  accrued  depreciation  is  recognized;  and  (c)  when  a 
unit  is  abandoned. 


THE  ASSET  ACCOUNTS  53 

5. 

(Form  B) 
Journalize  the  following  transactions : 

(a)  Buildings  depreciate,  $500. 

(b)  Machinery  is  purchased  for  cash,  $1,000. 

(c)  Land  is  purchased,  $5,000.  A  mortgage  for  $2,000  is 
given ;  the  balance  is  paid  in  cash. 

(d)  An  appraisal  one  year  after  the  purchase  of  the  land 
mentioned  in  (c)  discovers  that  the  land  is  now  worth  $500  more 
than  its  purchase  price. 

(e)  An  adjacent  parcel  of  land  is  purchased  for  $1,000  in 
cash. 

(f)  Machinery  which  cost  $2,000  (and  is  carried  in  the 
books  at  that  figure)  is  sold  for  $1,500. 

(g)  Office  furniture,  $500,  is  purchased  on  account. 

(h)  The  furniture  mentioned  above  is  returned  as  unsatis- 
factory. 

(i)  The  land  mentioned  in  (e)  is  sold  for  $1,200.  Terms: 
$200  in  cash  and  a  60-day,  6%  note  for  the  balance. 

(j)  Buildings  are  damaged  by  a  storm  to  an  amount  esti- 
mated at  $3,000. 

(k)  Because  of  the  introduction  of  a  new  device  the  firm  is 
obliged  to  discard  a  machine  which  has  a  net  book  value  of  S60C 
and  a  gross  book  value  of  $1,000.     Scrap  value  is  S75. 

(1)  A  new  wing  is  constructed  on  one  of  the  buildings  cost- 
ing $10,000. 

6. 

(Form  B) 

Westcott  Bros,  buy  twelve  like  units  of  equipment  on  Jan.  i. 
1917,  at  a  cost  of  $60,000.  At  the  end  of  the  year  it  is  decided 
that  10%  of  the  cost  should  be  allowed  for  depreciation.  At  the 
end  of  1918  a  similar  allowance  for  depreciation  is  made.     On 


54  PROBLEMS  AND  EXERCISES 

July  I,  1919,  because  of  an  accident,  it  is  necessary  to  scrap  one 
machine.    The  salvage  value  (for  which  cash  is  received)  is  $300. 
Journalize  these  transactions.    What  is  the  net  book  value  of 
the  equipment  after  the  entries  have  been  posted  ? 


Make  a  list  of  the  fixed  tangible  assets  of  some  enterprise 
with  which  you  are  familiar. 

Accounts  with  Fixed  Intanxibles 

8. 

''In  general  securities  are  not  in  themselves  assets ;  they 
merely  represent  or  evidence  valuable  rights.  A  coupon  Liberty 
bond,  however,  is  a  tangible  asset,  since,  if  it  is  lost  or  stolen,  the 
original  holder  has  thereby  lost  his  rights.  Similarly  a  bank  note 
payable  to  bearer,  while  in  a  sense  merely  an  evidence  of  a  right 
against  the  issuing  bank,  .constitutes  a  tangible  asset  since  the 
right  is  enforceable,  by,  and  only  by,  whoever  happeans  to  hold 
the  note." 

Discuss. 

9- 

"Rights  appear  in  accounting  records  under  duplicate  heads — 
equities  in  one  case,  assets  in  another.  A  material  asset,  on  the 
other  hand,  is  never  found  on  more  than  one  balance  sheet." 
Explain. 

10. 

"There  are  four  bases  for  distinguishing  between  fixed  and 
current  assets:  (i)  liquidity;  (2)  rate  of  conversion  to  ex- 
pense; (3)  length  of  life;  (4)  technical  method  of  utilization." 
Discuss.  Show  that  (2)  and  (4)  would  always  apply  to  exactly 
the  same  cases,  but  that  otherwise  each  basis  has  some  distinctive 
application. 


THE  ASSET  ACCOUNTS  55 

iz. 

(Form  B) 

The  securities  ledger  of  a  trust  company  is  controlled  in  the 
general  ledger  by  the  following  asset  accounts:  Bonds,  Mort- 
gages, Annuities,  Stocks.  Journalize  the  following  transactions, 
making  use  of  the  controlling  accounts  only : 

(a)  Bonds  are  purchased  (Pensacola  4's,  due  1953)  to  the 
amount  of  $12,015,  including  brokerage  and  revenue  taxes. 

(b)  Funds  to  the  amount  of  $34,000  are  invested  in  first 
mortgages  on  New  York  City  real  estate. 

(c)  $15,000  in  first  mortgage  bonds  (Harrison  Railways  5's) 
matured  today,  and  cash  is  received.  (Assume  that  these  bonds 
were  carried  in  the  accounts  at  $15,000.) 

(d)  Thirty  shares  of  stock  in  the  Pennsylvania  R.  R.  Co. 
are  sold  @  38j4-  The  broker's  commission  is  12^  cents  pel 
share.  This  stock  was  purchased  and  carried  in  the  accounts 
@6i. 

(e)  At  the  end  of  the  year  it  is  discovered  that  there  is  a  net 
decrease  in  the  value  of  stock  holdings  amounting  to  $43,000. 

(f)  Three  hundred  shares  of  stock  in  the  American  Tele- 
phone &  Telegraph  Co.  are  purchased  @  10634  ',  the  broker's  com- 
mission is  12^^  cents  per  share. 

(g)  Bond  holdings  have  appreciated  during  the  year, 
$31,000. 

(h)  Mortgages  mature  and  are  paid  in  full  to  the  amount  of 
$16,000. 

(i)  Annuities  are  purchased  from  the  Greenwich  Insurance 
Co.,  $39,000, 

(j)  The  1917  bonds  of  the  N.  Y.  River  R.  R.  Co.  mature  and 
are  paid,  $21,000.  (These  bonds  were  issued  at  par  and  the 
trust  company  was  an  original  subscriber.) 


56  PROBLEMS  AND  EXERCISES 

(k)  The  firm  invests  an  estate  of  $11,750  in  U.  S.  Steel 
(preferred)  @  117^  (including  commission). 

Name  several  types  of  business  enterprises  other  than  trust 
companies  the  assets  of  which  consist  largely  in  securities. 

12. 

Give  illustrations  of  assets  which  represent  long-term  rights 
to  services.  With  illustrative  entries  explain  the  accounting  treat- 
ment for  such  items. 

13. 

Give  illustrations  of  intangible  assets  which  represent  the 
values  of  privileges  conferred  by  governments  and  the  value  of 
public  opinion  peculiar  to  the  individual  concern. 

Functional  Classification  of  Fixed  Asset  Accounts 

14. 

Explain  the  importance  of  a  functional  classification  of  the 
fixed  asset  accounts.  Show  that  such  a  division  is  not  always 
easily  made. 

15. 

Recently  a  certain  railway  company  undertook  an  investiga- 
tion to  determine  switching  costs  in  a  terminal.  Show  that  such  a 
study  would  involve  an  attempt  to  segregate  the  asset  values  de- 
voted essentially  to  switching  operations. 

16. 

In  a  certain  city  a  municipal  enterprise  and  a  private  con- 
cern were  competing  in  furnishing  electric  light  and  power.  The 
municipal  company  (which  was  also  the  city  water  company)  was 
cutting  lighting  rates  far  below  cost  to  the  private  plant.  The 
private  enterprise  contended,  however,  that  the  water  consumers 
,were  paying  a  large  part  of  the  maintenance  and  depreciation 
costs  which  should  have  been  charged  to  the  production  of  light. 

Explain  the  importance  of  a  proper  apportionment  of  fixed 
asset  values  in  such  a  case. 


THE  ASSET  ACCOUNTS  57 

17- 

A  certain  coal  company  owns  sheds,  unloading  equipment, 
barn,  scales,  horses,  truck,  wagons,  harnesses,  etc.,  office  build- 
ing, adding  machine,  desk,  other  office  equipment,  business  car, 
and  liberty  bonds.  It  holds  a  lease  giving  occupation  rights  in 
a  coal  yard  for  twenty  years. 

Prepare  a  functional  classification  of  fixed  asset  accounts  for 
this  business  under  three  main  heads,  "yard,"  "delivery,''  and 
"general". 

18. 

Classify  the  following  under  the  principal  fixed  asset  head- 
ings discussed  in  Chapter  VI  of  the  text:  (i)  a  railroad  right-of- 
way;  (2)  an  oil  well;  (3)  a  vineyard;  (4)  franchise;  (5)  grain 
elevator;  (6)  tanning  vat ;  (7)  chemical  formulas;  (8)  passenger 
coach;  (9)  timber  tract;  (10)  fishing  rights;  (11)  team  of  draft 
horses;  (12)  U.  S.  Steel  stock;  (13)  trade-marks;  (14)  type- 
writers; (15)  carrying  cranes. 

Accounts  with  Current  Tangible  Assets 

19. 

Classify  the  following  into  fixed  and  current  assets:  (i) 
cash;  (2)  a  2-year  promissory  note;  (3)  an  insurance  premium; 
(4)  a  "Liberty"  bond;  (5)  a  lo-year  real  estate  mortgage;  (6) 
a  patent  right;  (7)  raw  materials;  (8)  foundation  of  an  18-story 
building;  (9)  a  Ford  car;  (10)  milk  bottles;  (11)  a  lawn  mower; 
(12)  show  cases.  Show  that,  in  several  cases  at  least,  your  ans- 
wer involves  an  assumption  with  respect  to  the  ownership  and  use 
of  the  asset,  and  that,  under  another  assumption  in  these  regards, 
your  answer  might  be  different. 

20. 

The  terms  "liquid"  and  "working"  are  frequently  used  to  de- 
signate particular  groups  of  current  assets.  Explain,  with  illus- 
trations, what  you  would  expect  each  of  these  headings  to  cover. 


58  PROBLEMS  AND  EXERCISES 


21. 


x^rgue  that  cash,  in  many  of  its  forms,  is  not  a  tangible  asset, 
but  only  a  highly  liquid  account  receivable. 


22. 


Illustrate  the  various  occurrences  which  may  effect  the  ]\Ier- 
chandise  account.    The  Cash  account. 


Accounts  with  Current  Rights 

23. 

How  would  you  classify  the  "Wages"  account  of  a  shoe  deal- 
er?   Of  a  manufacturer  of  locomotives? 

24. 

(Form  B) 
Journalize  the  following  transactions : 

(a)  The  firm  discounts  its  60-day,  non-interest  bearing  note 
for  $1,000  at  the  bank  at  6%. 

(b)  The  firm  buys  a  bill  of  goods  amounting  to  $1,500  from 
the  Helvetia  Grocery  Co.  A  discount  of  2%  is  offered  for  cash 
if  paid  in  10  days.  The  firm  discounts  its  30-day  note  at  the 
bank  at  6%  to  produce  the  required  amount. 

(c)  A  bill  of  goods,  $1,000,  is  sold  to  the  X  Co.  Terms, 
2/10  n/30.    The  X  Co.  accepts  the  discount  10  days  later. 

(d)  Goods  are  sold  to  J.  S.  Bowles  for  $700.  Bowles  pays 
cash,  $200,  and  gives  a  30-day,  6%  jjote  for  the  balance.  Three 
days  later  the  firm  discounts  Bowles'  note  at  the  bank  at  a  6% 
rate.  On  maturity  Bowles  fails  to  pay  the  note.  It  is  discovered 
that  he  is  bankrupt;  and  the  firm  is  obliged  to  take  up  the  note 
from  the  bank  and  pay  protest  fees  of  $5. 

(e)  R.  A.  Rowley  owes  the  firm  $500  on  open  account.  He 
asks  the  firm  to  accept  a  60-day,  non-interest  bearing  note  for 


THE  ASSET  ACCOUNTS  59 

$500  drawn  in  his  favor  by  B.  R.  Jackson  to  settle  the  account. 
The  note  is  accepted  and  immediately  discounted  at  a  6%  rate. 

(f)  The  firm  buys  a  bill  of  goods  from  the  Helvetia  com- 
pany amounting  to  $850.  Terms,  2/10,  n/30.  These  terms  are 
unsatisfactory  and  a  discount  of  3%  is  finally  allowed  and  ac- 
cepted. 

(g)  The  firm  draws  a  30-day  draft  on  a  customer  (S.  A. 
Berg)  for  $1,200.    The  draft  is  accepted. 

25- 

Illustrate  the  various  transactions  which  may  occur  in  con- 
nection with  an  account  representing  a  service  (Insurance,  for 
example). 

Miscellaneous 

26. 

(Form  B) 

The  following  transactions,  it  will  be  assumed,  record  the 
history  of  a  particular  shipment  of  drugs  in  the  hands  of  A.  R. 
Squier,  a  wholesaler.  You  are  asked  to  prepare  appropriate 
journal  entries. 

(i)  Merchandise  is  received  from  Blair  and  Davis.  It  has 
been  bought  on  account.  The  price,  f.o.b.  point  of  shipment,  is 
$1,000. 

(2)  Freight  on  this  shipment  is  paid,  $100. 

(3)  Demurrage  charges  on  the  same  shipment  are  paid,  $10. 

(4)  S.  A.  Davis  delivers  this  shipment  to  Squier's  ware- 
house and  leaves  his  bill  for  $20. 

(5)  These  goods  are  repacked.  The  labor  cost  is  $50,  the 
cost  of  cartons  and  other  material  is  $50.  The  labor  cost  is  paid 
in  cash ;  the  materials  required  are  taken  from  stock. 

(6)  Revenue  stamps  are  purchased  for  cash,  $200.  These 
stamps  are  affixed  to  the  goods. 


6o  PROBLEMS  AND  EXERCISES 

(7)  These  goods,  repackaged,  are  sold  on  account  to  S.  M. 
Murfin,  a  retailer,  for  $1,600.  Shipping  costs,  paid  in  cash, 
total  $30. 

(8)  It  is  estimated  that  of  the  insurance  carried  the  amount 
of  $10  is  applicable  to  this  operation. 

27. 

The  following  is  a  list  of  the  fixed  assets  of  Bobbey  Bros., 
carpet  manufacturers:  Estate  of  John  Bobbey  (in  a  trust  fund), 
Hygiene  Fleece  Underwear  stock,  endowment  insurance  policies 
covering  the  partners'  lives,  office  furniture,  office  appliances, 
horses,  wagons,  motor  trucks,  patents,  drawings,  carpet  mills — 
buildings,  carpet  mills — machinery,  carpet  mills — fixtures  and  ap- 
pliances, tools,  real  estate,  goodwill. 

Prepare  an  outline  of  fixed  asset  accounts  covering  these 
items  which  emphasizes  the  important  lines  of  classification  stress- 
ed in  Chapter  VI  of  text. 

28. 

Hanavan  and  Co.,  shoe  manufacturers,  have  the  following 
fixed  assets :  machinery,  tools,  parts,  lasts,  forms,  patterns,  click- 
ing dies,  fixtures,  long-term  loans  to  employees.  United  Shoe 
Machinery  Co.  stock,  goodwill,  office  equipment,  land  and  build- 
ings. 

Present  a  suitable  outline  of  accounts. 

29. 

On  June  10,  S.  B.  Smiley  orders  merchandise  amounting  to 
$2,000  from  Dryer  and  Waters,  wholesalers.  Since  Smiley  is  a 
new  customer  they  ask  for  an  advance  deposit  of  $500.  On  June 
15,  Smiley  sends  a  check  for  the  amount.  The  goods  are  received 
on  June  25. 

Give  the  journal  entries  covering  this  situation  on  Smiley's 
books,  and  explain  any  doubtful  points. 


THE  ASSET  ACCOUNTS  6i 


30- 


A  manufacturer  and  wholesaler  of  furniture,  draperies  and 
carpets  has  current  assets  on  hand  at  the  end  of  a  particular  per- 
iod as  follows :  customers'  balances,  accrued  interest  on  bank 
deposits,  deposit  on  contract  to  buy  a  machine  shop  property,  in- 
surance premiums  prepaid,  advertising  paid  in  advance,  depart- 
mental supplies,  accrued  interest  on  notes.  Liberty  bond  coupons 
matured  but  not  presented,  bond  interest  accrued  but  not  matured, 
overpayment  of  federal  taxes,  furniture,  lumber,  draperies,  other 
material,  furniture  in  process,  office  salaries  advanced,  bank  ac- 
count, and  cash  on  hand. 

Set  up  an  appropriate  outline  of  current  asset  accounts. 


VII 

FURTHER  CLASSIFICATION  OF  EQUITY  ACCOUNTS 

Accounts  with  Fixed  Equities 

I. 

(Form  B) 
Journalize  the  following  transactions  : 

(a)  Capital  stock  amounting  to  $20,000  is  issued  for  cash  at 
par. 

(b)  Capital  stock  amounting  to  $100,000  is  issued  in  ex- 
change for  a  factory  building  worth  $50,000,  and  a  patent  right 
worth  $50,000. 

(c)  A  promoter  of  a  corporation  is  given  $500,000  of  capital 
stock.  In  return  he  turns  over  to  the  corporation  certain  mineral 
lands  valued  at  $100,000.  The  balance  is  considered  payment 
for  his  services  in  organizing  the  company. 

(d)  The  net  revenue  available  to  stockholders  amounts  to 
$150,000.  A  dividend  of  $75,000  is  declared,  and  the  balance  is 
carried  to  surplus. 

(e)  Bonds  to  the  extent  of  $100,000  are  called  in  and  capital 
stock  of  an  equal  amount  issued  in  exchange. 

(f)  Bonds  of  a  par  value  of  $150,000  are  issued  for  $175,- 
000. 

(g)  The  bonds  in  (f)  are  issued  for  $125,000. 


Distinguish  between  fixed  and  current  liabilities.     Why  is 
it  important  that  this  distinction  be  emphasized  in  accounting? 


CLASSIFICATION  OF  EQUITY  ACCOUNTS  63 

3- 

How  do  the  proprietary  accounts  of  the  partnership  differ 
from  those  of  the  sole-proprietorship?  Whose  interest  consiti- 
tutes  the  proprietorship  in  the  case  of  the  corporation  ?  What  are 
the  principal  proprietary  accounts  in  this  case  ? 

4- 

"The  character  of  the  liabilities  is  much  the  same  regardless 
of  the  physical  nature  of  the  business.  In  the  case  of  the  assets 
the  situation  is  quite  different." 

Explain  what  is  meant  and  try  to  show  that  this  is  the  case. 

Classes  of  Expense  and  Revenue  Accounts 

5- 

What  is  the  significance  of  the  term  operating  net  revenue? 
What  is  the  essential  distinction  between  a  charge  to  expense  and 
a  charge  against  net  revenue  ? 

6. 

On  the  books  of  A.  W.  Saxby,  a  real  estate  dealer,  is  an 
account  entitled,  "Office  Supplies."  The  bookkeeper  charges  the 
cost  of  all  stationery,  postage,  etc.  to  this  account  as  acquired. 
The  purchase  of  such  items  average  about  $50  per  month.  The 
stock  on  hand  commonly  amounts  to  about  $15.  The  books  are 
closed  once  a  year. 

How  would  you  classify  this  account?     Give  reasons. 

(Form  B) 
Journalize  the  following  transactions: 

(a)  The  sales  of  merchandise  by  a  retail  store  amount  to 
$100,000.    Cash  sales  amount  to  $60,000,  and  credit  sales  to  $40,- 

000. 

(b)  The  purchase  price  of  the  goods  sold  (referring  to  the 

transaction  in  (a))  amounts  to  $55,000. 


$4  PROBLEMS  AND  EXERCISES 

(c)  The  salaries  of   employees  amounting  to  $20,000  are 
paid. 

(d)  The  amount  of  fuel  consumed  is  $2,000. 

(e)  The  building  has  depreciated  by  $500. 

(f)  Miscellaneous  supplies  are  consumed,  $800. 

(g)  Advertising  services  utilized  amount  to  $1,500. 

8. 

Construct  a  single  expense  and  revenue  account  from  the  en- 
tries made  in  Exercise  7.     What  is  the  operating  net  revenue? 


What  is  the  importance  of  a  classification  of  expense  ac- 
counts on  a  functional  basis?  State  some  of  the  difficulties  in- 
volved in  making  such  a  classification.  Show  that  a  similar 
classification  of  revenue  accounts  may  be  more  easily  made. 

10. 

Classify  the  following  expense  titles  under  buying,  produc- 
tion, selling  and  collection,  administration,  and  miscellaneous: 
outward  freight,  express,  postage,  fire  loss,  posters  and  price  lists, 
directors'  fees,  donations,  watchmen's  wages,  entertainment  of 
customers,  buyers'  salaries,  overtime  bonuses  to  operatives,  adver- 
tising, experimental  expense,  maintenance  of  employees'  houses, 
delivery  expense,  legal  expenses,  insurance  on  factory  and  equip- 
ment, other  property  insurance,  workmen's  compensation  insur- 
ance, audit  expenses,  direct  material  cost,  factory  supplies  con- 
sumed, miscellaneous  office  supplies,  productive  labor,  factory  su- 
pervision, estimated  bad  accounts,  collection  agency  charges,  heat 
and  light,  power  service,  miscellaneous  factory  expense,  office 
salaries,  officers'  salaries,  taxes,  salesmen's  salaries,  salesmen's 
commissions,  repairs  to  factory,  depreciation  of  factory,  mainte- 
nance of  office,  depreciation  of  office,  store  repairs,  depreciation 
of  store  equipment,  maintenance  of  store  equipment,  depreciation 


CLASSIFICATION  OF  EQUITY  ACCOUNTS  65 

of   machinery,   depreciation   of   office    furniture,   wrapping   and 
crating  supplies,   wages  of   wrappers  and  shippers,   employees' 
pensions,  depreciation  of  drawings  and  patterns,  salaries  of  man- 
agers, and  billing  customers  expense. 
Discuss  any  doubtful  cases. 

Net  Revenue  and  Surplus  Accounts 

II. 

(Form  B) 
Journalize  the  following  transactions : 

(a)  The  operating  net  revenue  shown  as  a  result  of  the  trans- 
actions in  Exercise  7  is  carried  to  the  Net  Revenue  account. 

(b)  Interest    accrued    on    mortgages    payable    amounts    to 

$3-500- 

(c)  Interest  received  on  bank  deposits  amounts  to  $250. 

(d)  Goods  amounting  to  $2,000  were  stolen  in  transit. 

(e)  The  directors  declare  a  6%  dividend  amounting  to 
$3,000. 

(f)  The  sum  of  $5,000  is  appropriated  as  a  reserve  for 
contingencies. 

(g)  The  balance  of  net  revenue,  $6,950,  is  transferred  to 
surplus. 

12. 

Construct  a  single  net  revenue  acount  covering  all  of  the 
adjustments  involved  in  Exercise  11. 

13. 

Show  why  rent  debits  and  credits  belong  in  the  expense  and 
revenue  rather  than  the  net  revenue  classifications. 

Give  several  reasons  for  treating  taxes  as  a  net  revenue 
charge  rather  than  an  expense  charge.  Show  that  there  are  ob- 
jections to  this  treatment  also. 


66  PROBLEMS  AND  EXERCISES 

14. 

The  Expense  and  Revenue  account  of  the  B  Co.,  after  all 
expenses  and  revenues  are  transferred  thereto,  shows,  in  a  partic- 
ular period,  an  excess  of  credits  of  $36,000.  Give  the  journal  en- 
tries necessary  to  transfer  this  balance  to  Net  Revenue. 

The  directors  now  authorize  the  recognition  of  accrued  in- 
come and  profits  taxes,  $6,000;  declare  a  dividend  of  $12,000; 
authorize  a  charge  of  $3,000  for  accrued  interest  on  mortgages; 
and  order  the  balance  of  Net  Revenue  transferred  to  Surplus. 
Show  the  journal  entries  necessary  to  give  effect  in  the  accounts 
to  these  actions  of  the  board. 

15. 

Classify  the  following  account  titles  under  the  headings  ex- 
pense, revenue,  net  revenue,  and  surplus  : 
Raw  Materials   (utihzed). 
Labor. 

Taxes  (paid). 

Telephone  (rentals  paid  for  services  furnished). 
Advertising  (circulars  used). 
Repairs  to  Equipment. 
Repairs  to  Buildings. 

Accounts  Receivable    (found  to  be  worthless). 
Salaries  of  Officials. 
Supplies  (used). 
Rent  (received). 
Rent  (paid). 
Surplus. 

Reserve  for  Additions  and  Improvements,    . 
Interest  on  Notes  Receivable. 
Interest  on  Notes  Payable. 
Sales. 

Accounts  with  Current  Liabilities 

16. 

What  are  accrued  liabilities? 


CLASSIFICATION  OF  EQUITY  ACCOUNTS  67 

17. 

Show  a  method  by  which  the  contingent  HabiHty  arising 
when  customers'  notes  are  endorsed  and  banked  may  be  recog- 
nized.    (See  page  129  of  the  text.) 

18. 

Scrutinize  the  HabiHty  side  of  the  balance  sheet  shown  in 
Appendix  C  of  the  text,  pages  668-674. 

19. 

At  the  end  of  the  year  the  books  of  a  certain  manufacturer 
and  w'holesaler  show  current  HabiHty  items  as  foHows :  loans 
from  employees,  bills  of  exchange  outstanding,  merchandise  cred- 
itors' balances,  commissions  and  bonuses  payable,  full  paid  sales 
undelivered,  estimated  income  and  profits  taxes,  accrued  interest 
on  mortgage,  salaries  and  wages  payable,  notes  payable,  printer's 
bill,  general  manager's  salary  due,  bank  overdraft,  deposits  made 
on  account  of  undelivered  sales,  state  corporation  tax  accrued, 
Samuelson  &  Co. — prepayments  on  6-year  sublease  (expiring  in 
one  year),  D.  \V.  ^^'right — damages  assessed,  and  amounts  due 
to  consignors. 

Set  up  a  detailed  outline  of  current  liability  accounts  for  this 
case. 

20. 

"In  general  American  business  is  conducted  on  a  credit  basis ; 
that  is,  goods  are  delivered  in  advance  of  payment.  In  some 
cases,  just  the  reverse  order  is  followed,  however.  Transporta- 
tion companies,  amusement  houses,  insurance  companies,  etc., 
and  certain  retailers,  such  as  milk  dealers,  frequently  receive  pay- 
ment from  customers  in  advance  of  the  furnishing  of  the  partic- 
ular commodity  or  service  involved.  This  sort  of  transaction, 
payment  before  deliver}-,  leads  to  a  special  liability  on  the  books 
of  the  vendor,  a  liability  of  which  the  chief  peculiarity  lies  in  the 
fact  that  it  is  finally  liquidated  with  commodities  or  serv-ices 
rather  than  cash." 

Explain,  giving  a  concrete  illustration. 


VIII 
CLOSING  AND  INTERPRETING  THE  ACCOUNTS 

The  Trial  Balance 

I. 

Explain  the  construction  of  the  trial  balance.  What  is  its 
function? 

2. 

"The  trial  balance  has  very  distinct  limitations.  In  the  first 
place  it  will  not  disclose  the  complete  omission  of  a  transaction. 
Further,  it  does  not  prove  that  transactions  have  been  properly 
analyzed.  Still  further,  it  will  not  disclose  a  numerical  mistake 
which  has  an  equal  effect  on  both  ledger  columns." 

Explain,  giving  illustrations. 

3. 

(Form  B) 
Prepare  a  trial  balance  from  the  ledger  of  John  Reed,  pro- 
prietor, as  of  February  27  (Exercises  2,  3,  and  4,  Chapter  V). 

4- 

(Form  B) 
Take  a  trial  balance  directly  from  the  journal  of  J.  B.  Preston 
as  of  Oct.  25  (Exercise  6,  Chapter  V). 

5- 

(Form  B) 
Arrange  the  following  ledger  balances  into  a  trial  balance: 

Real  Estate    $10,000 

Buildings    I5.500 

Fixtures    2,500 


CLOSING  AND  INTERPRETING  ACCOUNTS  69 

Notes  Payable  2,100 

Mortgage  Payable 5>ooo 

Notes  Receivable ^0° 

Accounts  Payable  3.400 

Merchandise  Purchases 16,900 

Merchandise  Sales   26,300 

Deliver}'  Equipment 6°^ 

Fuel   300 

Miscellaneous  Expense   I'^oo 

Accounts  Receivable    3.900 

Interest  Received   ^°° 

Interest  Paid   600 

Rent 400 

Proprietors   18,200 

Wages  and  Salaries  1.200 

Cash    


2.000 


6. 

(Form  B) 
Take  a  trial  balance  from  the  ledgers  prepared  in  Exercise 
19,  Chapter  V. 

The  Necessity  for  Inventory  and  Appraisal 

7- 

Explain  fully  why  the  trial  balance  does  not  ordinarily  rep- 
resent the  exact  current  status  of  the  enterprise. 

8. 

Explain  the  significance  of,  and  show  the  necessity  for,  the 
accounting  period. 

9- 

''Accounting  might  perhaps  be  defined  as  the  mechanism  by 
which  an  attempt  is  made  to  make  a  periodic  classification  of  the 
financial  history  of  the  business  enterprise.     The  emphasis  upon 


yo  PROBLEMS  AND  EXERCISES 

the  period  is  responsible  for  virtually  all  accounting  analysis.     If 
the  significant  period  were  50  years  in  length,  for  example,  there 
would  be  no  such  thing  as  accounting  in  the  ordinary  sense." 
Comment  on  this  statement. 

10. 

State  with  illustrations  the  different  bases  for  taking  inventor- 
ies.   In  what  cases  is  a  perpetual  inventory  feasible? 

Closing  xA.ccounts  with  Fixed  Assets 

II. 

Delivery  Equipment 
Jan.     I     Inventory  $500 

16  J  32       150 

The  above  statement  represents  the  Delivery  Equipment  ac- 
count of  a  certain  enterprise  at  the  time  of  taking  the  trial  balance 
at  the  end  of  the  year.  The  management  decides  that  the  de- 
preciation for  the  year  amounts  to  $120. 

Close  this  account  (giving  the  necessary  journal  entries')  and 
bring  down  the  proper  balance  for  Dec.  31. 

12. 

The  Machinery  account  of  the  A.  Co.  has  a  debit  balance 
Jan.  I  of  $49,000.  The  Allowance  for  Depreciation  of  Machinery 
account  has  a  credit  balance  on  the  same  date  of  $6,200.  On  Dec. 
31  the  value  of  the  machinery  on  hand  is  estimated  at  $38,300. 

Give  the  entries  necessary  to  close  these  accounts  and  ex- 
hibit them  as  they  would  appear  when  closed.    • 

13- 

(Forms  B  and  C) 

The  X  Co.'s  Plant  and  Factory  Equipment  account  shows  a 

debit  balance  Dec.  31,  1918,  of  $48,000.    At  this  time  Allowance 

for  Depreciation  shows  a  credit  balance  of  $3,000.     On  July  i, 

1919,  new  property  is  acquired  at  a  cost  of  $6,000.     On  Sept.  i. 


CLOSING  AND  INTERPRETING  ACCOUNTS  71 

1919,  one  unit  of  the  plant  (with  a  gross  book  vakie  of  $8,000  and 
a  net  book  value  of  $6,000)  is  dismantled.  The  cost  of  demolition 
is  $200  (which  represents  the  wages  of  workmen  already  in- 
cluded in  the  regular  payroll)  and  the  salvage  is  sold  to  a  junk 
dealer  for  $800.  The  chief  accountant  decides  that  the  proper 
depreciation  rate  to  use  in  closing  the  books  Dec.  31,  1919,  is  10% 
per  annum  of  gross  book  values. 

Show  journal  entries  giving  effect  to  the  above,  and  exhibit 
the  two  accounts  mentioned  as  they  would  appear  when  closed 
Dec.  31,  1919. 

In  the  same  ledger  on  Dec.  31,  the  Office  Equipment  account 
shows  total  debits  of  $2,200  and  no  credits ;  the  Allowance  for 
Depreciation  of  Office  Equipment  shows  credits  of  $220  and  no 
debits. 

Using  a  depreciation  rate  of  10%  on  gross  book  value,  give 
the  journal  entries  necessary  to  recognize  the  depreciation  ex- 
pense for  the  year  and  exhibit  the  two  accounts  mentioned  as 
they  would  appear  when  balanced. 

Materials,  Sales  and  Subsidiary  Accounts 

14. 

(Forms  B  and  C) 
You  are  handed  the  following  summary  information  regard- 
in  a  month's  business  of  a  manufacturing  and  wholesale  canning 
company : 

Materials  on  hand  Jan.  i $27,280 

Finished  goods  on  hand  Jan.  i 11,500 

Purchases  of  materials  during  January.  . . ,  29,400 

Defective  materials  returned   250 

Purchase   discounts   secured    through   cash 

payments  560 

Other  rebates  and  allowances  on  materials.  .  300 

Sales  of  finished  goods  during  the  month, , .  31,000 

Discounts  on  sales   420 


72  PROBLEMS  AND  EXERCISES 

Goods  returned  190 

Freight   and    demurrage   charges    on    mate- 
rials             780 

Materials  on  hand  Jan.  31 32,000 

Finished  goods  on  hand  Jan.  31 6,700 

Prepare  an  exhibit  of  accounts  showing  how  you  recommend 
that  this  information  be  recorded.  Give  all  the  journal  entries 
necessary  to  close  these  accounts,  and  rule  the  accounts  as  closed. 

15. 

In  a  complex  retail  or  wholesale  enterprise  where  several 
departments  are  involved,  or  in  any  manufacturing  enterprise 
where  several  production  stages  as  well  as  many  departments  are 
necessary,  what  reasons  can  you  see  for  the  use  of  intermediate 
summary'  accounts  into  each  of  which  are  closed  a  number  of  sub- 
sidiary accounts?  (The  closing  of  such  accounts  as  In-Freight, 
Payroll,  etc.,  into  a  general  Merchandising  account  is  an  illus- 
tration of  the  use  of  such  an  account.) 

16. 

(Forms  B  and  C) 
The  B.  Co.  expends  for  labor  during  August  $22,000;  for 
materials,  $47,000.  All  other  costs  incurred  including  accruals 
such  as  depreciation  total  $26,000.  The  inventories  August  i 
are  as  follows:  Materials,  $10,000;  goods  in  process,  $8,000; 
finished  goods,  $16,000;  miscellaneous  supplies  etc.,  $2,000.  Sales 
during  the  month  total  $81,000.  On  Aug.  31  it  is  estimated 
that  materials  on  hand  amount  to  $13,000;  the  material  cost  of 
goods  in  process  is  $6,000;  and  the  material  cost  of  finished 
goods  on  hand  is  $12,000.  The  labor  cost  of  goods  in  process 
August  31  is  $5,000;  and  of  finished  goods,  $7,000.  The  invent- 
ory of  miscellaneous  items  August  31  is  $2,400.  It  is  estimated 
that  of  the  item  of  "other  costs''  there  should  be  charged  to  goods 
in  process,  $3,000,  and  to  finished  goods,  $3,500. 

Show  by  means  of  entries,  accounts,  and  explanations  how 
this  situation  would  be  handled  August  31. 


CLOSING  AND  INTERPRETING  ACCOUNTS  73 

17- 

(Forms  B  and  C) 

The  X  Chemical  Co.  begins  operations  Jan.  i,  1921.  During 
the  month  labor  costs  incurred  total  $15,000;  materials  ac- 
quired total  $10,000;  other  current  commodities  and  services  re- 
ceived amount  to  $2,000.  All  commodities  and  services  acquired 
are  considered  to  be  bought  on  account.  Payments  are  made  as 
follows:  payroll,  $14,000;  materials,  $2,000;  other  current  com- 
modities and  services  $2,500  (of  this  amount  $800  represents  pay- 
ment in  advance  for  services  not  yet  received).  All  of  these 
values  received  are  converted  into  finished  goods  except  materials, 
$3,000,  and  "other  current  commodities  and  services,"  $500.  No 
work  in  process  classification  is  recognized.  On  Jan.  31  finished 
goods  on  hand  have  a  cost  value  of  $2,000.  Sales  for  the  month, 
all  on  account,  total  $26,000 ;  collections  amount  to  $7,000. 

Prepare  journal  entries  covering,  in  summary  form,  the 
above  operations.  Rule  skeleton  accounts  and  post.  Assuming 
that  the  Company  has  no  fixed  assets  and  no  selling  or  general 
expenses  not  included  in  the  above  data,  what  was  the  net  revenue 
for  January  ? 

18. 

(Forms  B  and  C) 
A  newly  organized  company  buys  materials  during  the 
first  accounting  period  with  an  invoice  price  of  $35,000.  Freight 
charges  on  these  goods  total  $1,500.  Discounts  on  invoice  prices 
to  the  amount  of  $400  are  secured  by  making  prompt  payments. 
Materials  are  taken  from  the  store  room  and  put  in  process  dur- 
ing the  period  to  the  amount  of  $28,000.  The  payroll  totals 
$12,000,  and  factory  overhead  amounts  to  $1,000  for  the  period. 
Sales  total  $60,000.  At  the  end  of  the  period,  it  is  determined 
that  goods  in  process  have  a  material  cost  of  $3,000,  a  labor  cost 
of  $1,800,  and  an  overhead  cost  of  $100.  All  finished  goods  have 
been  shipped. 

Set  this  situation  up  in  accounts,  using  the  following  titles : 


74  PROBLEMS  AND  EXERCISES 

Materials,  Freight,  Purchase  Discounts,  Goods  in  Process,  Labor, 
Factory  Overhead,  and  Sales.  Close  these  accounts,  giving  clos- 
ing entries,  into  an  account  entitled  Manufacturing  and  Trading. 
Exhibit  this  account  and  give  the  entries  necessary  to  close  it. 

19. 

(Forms  B  and  C) 

Bagdon  Baking  Co.  has  no  cost  system  and  does  not  attempt 
to  keep  a  continuous  inventory.  The  books  are  closed  each  month, 
an  inventory  being  taken  at  that  time.  On  Dec.  i,  1920,  the  Com- 
pany's Materials  and  Supplies  account  showed  an  inventory  bal- 
ance of  $1,200;  while  Finished  Stock  account  on  the  same  date 
showed  product  ready  for  sale  valued  at  $250.  There  was  no 
work  in  process.  During  December  purchases  of  materials 
(which  were  charged  to  Materials  and  Supplies)  totaled  $8,000 
and  sales  amounted  to  $25,000.  Materials  on  hand  Dec.  31  were 
priced  at  $1,500,  finished  stock  at  $50,  and  there  was  again  no 
work  in  process. 

Give  the  journal  entries  necessary  to  close  Materials  and 
Supplies,  Finished  Stock,  and  Sales  accounts  on  Dec.  31,  and 
show  these  accounts  as  they  would  appear  when  closed. 

Closing  Merchandise  Accounts 

20. 

(Forms  B  and  C) 

The  balances  of  the  merchandise  accounts  of  the  Stillwater 
Drygoods  Co.  on  Sept.  30  appear  as  follows :  Merchandise  In- 
ventory, $47,400  (Sept.  i);  Merchandise  Purchases,  $26,900; 
Merchandise  Sales  $38,700.  Merchandise  Cost  shows  no  balance. 
The  inventory  Sept.  30  is  $41,900. 

Give  the  journal  entries  necessary  to  close  these  accounts. 
Post  these  entries  (as  far  as  they  affect  the  merchandise  accounts) 
and  rule  and  close  the  accounts. 


CLOSING  AND  INTERPRETING  ACCOUNTS  75 

Record  the  same  information  as  above  in  a  single  ]Merchan- 
dise  account,  and  give  the  closing  entries  necessary  when  this 
procedure  is  adopted. 

21. 

Real  Estate 
Jan.     I     Inventory        $98,000     Jan.     9  J  17     $13,000 

6  J  16     21,500  22  J  18       72,000 

20  J 18      4,900  26  J  19         7,500 

29  J  19     11,800 

The  above  statement  represents  the  Real  Estate  account  of 
the  Roggers  Development  Co.  at  the  time  of  taking  the  trial  bal- 
ance. An  appraisal  shows  the  parcels  of  real  estate  remaining 
unsold  to  have  a  value  of  $52,000,  although  the  cost  price  was  but 
$49,000. 

Close   this   account,   making   all   necessary   journal    entries. 

22. 

A  retailer  (beginning  business  Alay  i)  buys  goods  during 
May  with  an  invoice  price  of  $7,500.  Freight  and  cartage  charges 
amount  to  $800.  The  cost  of  unpacking,  shelving  and  otherwise 
preparing  goods  for  sale  is  $350.  Clerk  hire  and  general  expense 
for  May  amounts  to  $200.  On  ]\Iay  31  an  inventory  is  taken 
which  shows  goods  on  hand  to  the  amount  of  $5,000,  invoice  price. 
Is  this  inventory  the  correct  figure  to  use  in  closing  the  accounts  ? 
Explain  fully. 

23. 

A  peddler  starts  for  town  with  a  load  of  potatoes  which  cost 
him  $90.  On  the  way  he  buys  10  bushels  more  at  $1.25.  He 
sells  during  the  day  70  bushels  at  $1.60.  At  night  he  has  left 
in  his  wagon  potatoes  amounting  to  $30,  at  cost. 

Set  up  this  information  in  a  single  account.  Ignoring  the  de- 
preciation of  equipment,  cost  of  horse  feed,  etc.,  what  was  the 
peddler's  profit  for  the  day? 


76  PROBLEMS  AND  EXERCISES 

24. 

(Forms  B  and  C) 
On  June  30  the  merchandise  inventory  of  the  A  Co.  is 
$37o,cxx).  Purchases  for  the  next  6  months  total  $710,000,  gross, 
but  not  including  freight  charges.  Inward  freight  is  paid  during 
this  period  of  $12,000;  of  this  amount  $1,000  is  applicable  to 
goods  received  prior  to  June  30;  on  Dec.  31  there  are  no  unpaid 
freight  charges  outstanding.  Goods  are  returned  to  jobbers  as 
unsatisfactory.  $3,000.  Rebates  and  allowances  on  purchases  dur- 
ing this  period  amount  to  $15,000.  Sales,  in  gross,  total  $980,000. 
During  the  period  allowances  to  customers  amount  to  $18,000. 
The  merchandise  inventory  Dec.  31  is  $340,000. 

(a)  Prepare  journal  entries  covering  the  above.  (Use  separ- 
rate  accounts  for  all  important  elements). 

(b)  Using  a  Merchandise  Trading  account  give  the  journal 
entries  necessary  to  close,  as  of  Dec.  31,  the  various  accounts 
relating  to  merchandise  which  you  have  used  (including  the  inven- 
tory account). 

(c)  Give  the  journal  entries  to  close  Merchandise  Trading 
and  exhibit  this  account  as  it  would  appear  when  closed  Dec.  31. 

25- 

(Form  B) 
The  Cobb  &  Corbett  Co.  keeps  a  single  merchandise  account. 
On  Dec.  31,  1920,  the  trial  balance  shows  this  account  with  a 
credit  balance  of  $5,000.  Give  the  journal  entries  necessary  to 
close  this  account,  (i)  assuming  the  current  inventory  to  amount 
to  $10,000;  (2)  assuming  no  inventory. 

Do  the  same  assuming  the  trial  balance  shows  a  debit  balance 
of  $50,000  for  Merchandise.  Repeat,  assuming  no  balance  in 
the  trial  balance. 

26. 
(Forms  B  and  C) 
The  following  is  a  section  of  the  trial  balance  of  the  Gordon- 
Summers  Co.,  wholesalers,  on  Dec.  31,  1920,  at  the  conclusion 
of  a  year's  operations : 


CLOSING  AND  INTERPRETING  ACCOUNTS  -j-j 

Dr.  Cr. 

Purchases $75,000 

Purchase  Returns $     1,000 

Sales   •• 100,000 

Purchase  Discounts   1,500 

Sales  Discounts   2,500 

Stock  on  hand  at  this  time,  priced  at  cost,  amounts  to  $20,000. 

Using,  in  addition  to  the  above  titles.  Inventor}^  Trading, 
and  Expense  and  Revenue  accounts,  give  the  necessary  closing 
entries  to  cover  this  situation,  and  rule  up  and  exhibit  the  ac- 
counts given  as  they  would  appear  when  closed. 

Closing  Accounts  Receivable 

27. 

(Forms  B  and  C) 

On  Jan.  i,  1920,  the  ledger  of  R.  A.  Downing,  after  closing, 
showed  Accounts  Receivable  with  a  balance  of  $3,000  and  Allow- 
ance for  Bad  Debts  with  a  credit  balance  of  $1,000.  During  1920 
credit  sales  totaled  $100,000;  collections  amounted  to  $90,000; 
customers'  accounts  were  written  off  as  worthless,  $800.  On  Dec. 
31,  1920,  it  is  decided  that  1%  of  the  credit  sales  for  the  year 
should  be  treated  as  uncollectible. 

Give  journal  entries  covering  this  situation  and  show  the  two 
accounts  named  as  they  would  appear  when  closed,  Dec.  31,  1920. 

28. 

(Forms  B  and  C) 

The  trial  balance  of  A  &  B,  after  a  year's  operation,  shows 
outstanding  customers'  accounts  amounting  to  $30,000.  80%  of 
the  total  credit  sales  for  the  period  have  been  collected,  and  the 
auditor  estimates  that  5%  of  these  sales  are  uncollectible. 

Using  a  valuation  account,  give  the  journal  entries  necessary 


7$  PROBLEMS  AND  EXERCISES 

to  dose  AccmmSs  Recdrabk  on  tliiis  basis  and  ^bovr  both  Ac- 
cocmts  Racesrable  and  Allowance  for  UncoJikctiUes  as  tbese  ac- 
counts  wonM  appear  wben  dosed. 

The  foUowing  month  it  is  dedded  tSiat'tbe  acconnt  of  X,  a 
castomer,  who  has  owed  a  balance  of  $i/xx>  for  sbc  months, 
should  be  writtt^i  off  as  woUhless,  as  he  is  found  to  be  a  bank- 
mpL    Jottinalize, 

Siic  months  later  X  receives  an  inheritance  and  pajs  tiae  ac- 
coomt  mentioned  abore  in  ftsll  widi  interest  for  one  year  at  7% 
Jmnrmdhe, 

(Fonns  B  and  C) 

Oa  Jtme  30  the  Accomits  Recdvable  accotmt  of  the  A 
Co,  shows  a  balance  of  $2io/xso;  tfie  Allowance  for  Doubt- 
ful  Accounts  diows  a  credit  balance  of  $3,200,  During  the 
ne%t  6  mondis  goods  are  sold  on  account  to  the  amount  of 
$800,000;  accottnts  are  collected  to  idie  amount  of  $810^000;  and 
sftedlic  accounts  are  writt^i  from  die  books  as  wordikss  totalling 
$5,100,  On  Dec,  31  it  is  dedded  that  the  proper  charge  to  revenae 
ioT  the  p^rktd  because  of  doubtftd  accounts  is  1%  of  the  total 
credit  sales, 

Gtve  journal  entries  covering  the  abore  transactions  (in- 
cladin^  doswig  entries)  for  the  period  July  i  to  Dec,  31,  and  ex- 
hibtt  Accounts  Kecm'able  and  Allowance  for  Doubtful  Accounts 
as  these  accounts  would  appear  whien  dosed,  Dec,  31, 

Cvsm%&  Om£R  Cwmsws  Accmmts 

30. 

In  the  trial  balance  of  the  Afblock  Tra^ng  Co,  on  Dec,  31, 
the  Petty  Cash  account  ^lows  totaJ  delntts  of  $3,700  and  total 
credits  of  $3,150,   A  count  of  cash  discloses  a  shortage  of  $15, 

Exhi?>it  this  account  as  it  would  appear  wh^i  €^mied  and 

show  closing  Journal  entries. 


CLOSIXG  AXD  IXTERPRETIXG  ACCOUNTS  79 

31- 

The  X  Co.  keeps  a  W'zges  and  Salaries  account.  On  Dec.  i 
this  account  shows  a  credit  inventor}-  of  S300,  and  a  debit  in- 
ventor}- of  $200.  Total  debits  during  the  month  of  December 
amounted  to  $3,800.  On  Dec.  31  wages  were  accrued  but  unpaid 
to  the  amount  of  S280.     Salaries  prepaid  amounted  to  S200. 

Give  all  closing  journal  entries,  and  present  this  account  as 
it  would  appear  when  closed. 

Under  what  conditions  would  it  be  proper  to  consider  the 
labor  cost  incurred  within  a  given  period  as  precisely  the  labor 
expense  of  that  period? 

32- 

The  Hoover  Manufacturing  Co.  operates  in  a  rented  build- 
ing. One  floor  is  sublet  for  storage  purposes  to  the  Jones  Over- 
all Co.  One  account  is  used  to  record  all  rent  transactions.  On 
Sept.  I  this  account  shows  a  debit  inventory  of  S50,  and  a  credit 
inventory  of  $350.  During  September  the  Hoover  company  pays 
$400  on  its  lease  and  receives  S75  from  its  sublease.  On  Sept. 
30  there  is  rent  accrued  but  unpaid  against  the  company  amount- 
ing to  S200,  and  in  its  favor  S25. 

Rule  this  account  and  close  as  of  Oct.  i.  making  closing  en- 
tries. 

How  much  per  month  does  the  Hoover  'Mig.  Co.  pay  for  the 
use  of  the  building?  How  much  does  the  Jones  Overall  Co.  pay 
per  month? 

33. 
(Forms  B  and  C) 

The  Johnson-Blair  Co.  pays  one  of  its  old  salesmen,  J.  \V. 
Hewlett,  a  salan.-  of  Sro.ooo  per  year.  In  addition  he  is  to  re- 
ceive a  commission  of  2%  on  the  gross  amount  of  business  for 
which  he  is  responsible  and  an  extra  bonus  of  $1,000  if  his  sales 
exceed  $250,000  per  year.  The  Company  keeps  two  accounts  with 
Hewlett  entitled,  "J.  W.  Hewlett— Salar}',"  and  "J.  W.  Hewlett- 
Commissions  and  Bonuses."     On  Jan.   i,   1920,  these  accounts 


8o  PROBLEMS  AND  EXERCISES 

showed  that  Hewlett  had  overdrawn  his  regular  salary  by  $1,500, 
but  that  the  Company  still  owed  him  $3,000  on  account  of  com- 
missions and  bonuses.  In  1920  Hewlett's  sales  total  $275,000. 
He  is  paid  cash  during  the  year  of  $13,000  (of  which  $10,000  is 
charged  to  his  salary  account)  ;  he  buys  250  shares  of  the  Com- 
pany's common  stock  at  $10  per  share  and  instructs  the  treasurer 
to  charge  the  cost  of  same  to  his  commission  account;  and  on 
Dec.  31,  1920,  he  accepts  preferred  stock  at  par  ($100)  for  the 
amount  of  the  net  balance  due  him  at  that  date. 

Give  journal  entries  covering  this  situation  during  and  at  the 
close  of  the  year  and  show  the  two  accounts  named  above  as  they 
would  appear  when  closed,  Dec.  31,  1920. 

34. 

The  Saracen  Steel  Co.  sublets  the  top  floor  of  its  main  build- 
ing to  Johnson  Bros,  at  $200  per  month.  The  Company  also 
leases  a  warehouse  from  T.  O.  Smalley  at  $200  per  month.  On 
Jan.  I,  1919,  rent  was  accrued  in  favor  of  T.  O.  Smalley,  $200. 
On  Dec.  31,  1918,  Johnson  Bros,  advanced  three  months'  rent, 
$600.  During  1919  the  Saracen  Company  pays  $2,800  to  Smalley 
and  receives  $1,400  from  Johnson  Bros. 

The  bookkeeper  of  the  Saracen  Steel  Co.  records  this  infor- 
mation in  a  single  account,  "Rents,"  showing  accruals  at  the  be- 
ginning of  the  period,  payments  and  receipts  during  the  year,  and 
accruals  Dec.  31,  1919.  Present  this  account  for  the  year  1919 
as  it  would  appear  when  closed,  Dec.  31,  1919.  What  effect  does 
this  account  have  upon  the  Company's  net  revenue   for   1919? 

35. 

(Forms  B  and  C) 

]\Iaking  use  of  four  accounts,  Building  Service — Cost,  Build- 
ing Service — Revenue,  Rent  Payable,  and  Rent  Receivable,  in- 
.  stead  of  the  single  account,  show  how  the  data  of  Problem  32 
would  be  handled.    Give  journal  entries  and  present  the  accounts, 
closed. 


CLOSING  AND  INTERPRETING  ACCOUNTS  8i 

36. 

The  Burr  Novelty  Co.  manufactures  three  patented  articles 
on  which  it  pays  Y,  the  inventor,  a  royalty  of  10%  of  gross  sales. 
The  Company  closes  its  books  once  a  year.  On  Jan.  i,  1920,  the 
Y  Royalties  account  shows  advances  to  Y  of  $500.  During  1920 
sales  of  the  three  articles  total  $50,000.  In  the  trial  balance  on 
Dec.  31,  1920,  the  Y  Royalties  account  shows  a  debit  balance  of 

$4,000. 

~  Give  the  closing  entries  for  this  account,  and  exhibit  it  as  it 
would  appear  when  closed.  (Assume  that,  during  the  year,  the 
bookkeeper  makes  no  record  of  the  accruing  cost  and  liability). 

37- 

The  following  account  is  found  in  the  ledger  of  a  small 
manufacturing  and  retail  company  : 

General  Expense 
June     I     Inventory    $280     June     i     Inventory   $30 

6  Insurance 50  25     Interest 5° 

7  Advertising    ...      10 

7     Postage  20 

7     Stationery    20 

12  Rent    300 

15  Commissions    .  .  60 

17  Freight  &  Cart.  80 

18  War  Rehef   ...  100 

19  Interest 25 

20  Loss  by  Fire.. .  130 

Examine  this  statement  critically,  indicating  the  various  ac- 
counting elements  involved.  Under  what  circumstances  might 
the  use  of  such  an  account  be  justified?  What,  in  such  a  case, 
would  be  a  more  appropriate  caption  than  "General  Expense"  ? 


82  PROBLEMS  AND  EXERCISES 

Summary  Accounts  for  Sundry  Assets  and  Liabilities 

38. 

A  firm's  coal  acount  shows  inventory  at  the  beginning  of  the 
period  $300,  and  purchases  during  the  period  of  $1,300.  The  new 
inventory  at  the  time  of  closing  is  $600. 

Using  a  Sundry  Assets  account  show  the  entries  necessary  to 
close  this  account  and  to  reopen  it  at  the  beginning  of  the  next 
period. 

39. 
(Form  B) 

Among  the  A  Co.'s  inventories  on  April  30  are  found  the 
following  items:  wages  accrued,  $300;  rent  unpaid,  $125;  adver- 
tising prepaid,  $75 ;  interest  receivable,  $84 ;  interest  payable, 
$850;  insurance  unexpired,  $220. 

Journalize,  making  use  of  a  Sundry  Assets  and  a  Sundry 
Liabilities  account. 

40. 

The  Allison  Mfg.  Co.  pays  the  freight  charges  on  all  goods 
shipped  to  regular  customers.  On  Nov.  i,  the  Freight  account 
shows  a  credit  inventory  balance  (freight  bills  unpaid)  amounting 
to  $1,650.  Actual  payments  on  account  of  outward  freight 
charges  during  November  total  $8,200.  Accumulated  unpaid 
freight  bills  on  Nov.  30  amount  to  $400. 

Prepare  exhibits  of  the  Freight  account  for  November  as  it 
would  appear  when  closed  and  give  the  necessary  closing  entries 
according  to  each  of  the  following  methods,  ( i )  showing  the  ac- 
crued liability  in  the  Freight  account  itself;  (2)  carrying  this 
liability  to  a  Sundry  Liabilities  account. 

Closing  tpie  Expense  and  Revenue  Accounts 
41. 
"While  the  business  man  commonly  thinks  of  wage  payments 
as  expense  when  incurred,  such  payments  in  the  case  of  a  manu- 
facturing enterprise  at  any  rate  are  not,  strictly  speaking,  costs  of 
producing  current  revenue." 


CLOSING  AND  INTERPRETING  ACCOUNTS  83 

Explain.  Show  that  few  accounts  appearing  in  the  typical 
trial  balance,  taken  before  any  adjustments  have  been  made,  are 
genuine  expense  accounts. 

42. 

In  the  trial  balance  of  the  Doonby  Box  Co.  you  find  among 
other  items  the  following: 

Dr.  Cr. 

Commissions   $4>5oo 

Payroll — Shipping  Department..   3,700 
Out-Freight,  Express  and  Post- 
age     1. 100 

Sales    $78,000 

Customers'  Entertainment 500 

Give  the  journal  entries  necessary  to  close  these  accounts. 

43. 

In  closing  the  books  of  the  Green-Black  Co.,  the  accountant 
for  the  Company  opens  up  several  temporary  expense  accounts. 
Examples  are,  Insurance  Expense,  Fuel  Cost,  and  Depreciation 
of  Building. 

Give  illustrative  entries  showing  how  the  accounts  named 
would  be  set  up  and  finally  closed.  What  function  can  be  ser\xd 
by  such  temporary  accounts. 

Closing  the  Net  Revenue  and  Equity  Accounts 

44. 

Define  carefully  and  illustrate  each  of  the  following  terms : 
loss ;  expense,  revenue ;  net  revenue ;  distribution  of  net  revenue ; 
surplus. 

45- 
(Form  C) 
The  following  account  is  taken  from  the  books  of  an  electric 
light  and  power  company: 


84  PROBLEMS  AND  EXERCISES 

Profit  and  Loss 

Wages  and  Salaries. .  .$  9,800  Balance   $10,020 

Supplies 13,300  Com.  Power  Sales...,   22,000 

General  Expense 11,600  Commercial  Lighting..    12,400 

Depreciation  of  Plant.     8,900  Street  Lighting   12,960 

Interest  on  Bonds 4,100  Miscellaneous   Revenue     7,400 

Dividends    2,000  Interest  Earned 390 

Loss  on  Aband.  Prop..      1,700 
Balance   i3,77o 


$65,170  $65,170 


Balance   $13,770 

Criticize,  preparing  an  exhibit  of  accounts  which  gives  a 
more  logical  presentation  of  this  information. 

46. 

A  certain  firm  uses  one  Interest  account  to  record  all  interest 
transactions.  On  Sept.  i  this  account  shows  a  debit  inventory  of 
$55  and  a  credit  inventory  of  $70.  During  the  month  interest 
was  paid  by  the  firm  on  notes  and  mortgages  amounting  to  $250 ; 
interest  was  received  on  notes  and  bank  balances  amounting  to 
$130.  On  Sept.  30  it  is  found  that  interest  is  accrued  and  un- 
paid :  on  notes,  $75,  on  mortgages,  $40.  Interest  accrued  on  notes 
receivable  amounts  to  $30,  on  bank  balances,  $25. 

Rule  this  account  and  close,  giving  journal  entries. 

47. 

The  Exeter  Co.  has  gross  revenues  for  the  month  of  De- 
cember amounting  to  $75,000;  gross  expenses  total  $54,000.  The 
directors  decide  to  declare  a  dividend  of  $20,000,  and  the  balance 
of  net  revenue  is  transferred  to  the  Surplus  account. 

Journalize,  using  Expense  and  Revenue,  Net  Revenue,  and 
Surplus  accounts. 


CLOSING  AND  INTERPRETING  ACCOUNTS  85 

48. 

The  capital  stock  of  a  small  corporation  is  owned  entirely 
by  three  individuals — A,  B  and  C.  A  is  president,  B,  secretary- 
treasurer,  and  C  is  general  manager.  Because  of  the  heavy 
tax  on  corporate  incomes  the  officers  v^ish  to  make  a  conservative 
showing  of  net  revenue.  It  is  decided  to  charge  salaries  to  ex- 
pense as  follows:  A,  $1,000;  B,  $1,500;  and  C,  $2,500.  It  is 
further  agreed  that  no  funds  shall  be  withdrawn  for  the  purpose 
of  paying  these  salaries.  Prepare  journal  entries  giving  effect 
to  this  procedure  in  the  accounts,  and  explain  the  significance  of 
the  transaction  fully. 

Later,  capital  stock  is  issued  to  the  various  officers  in  ap- 
propriate amounts  covering  the  undrawn  salary  balances.  Give 
journal  entries  and  discuss, 

49. 
(Forms  B  and  C) 
X,  a  speculator  in  securities,  uses  but  five  accounts  for  his 
business  affairs:      (i)    Securities;   (2)    Miscellaneous  Expense; 
(3)  Profit  and  Loss;  (4)  Cash;  (5)  X,  Capital.    The  Securities 
account  is  charged  with  the  cost  of  all  purchases,  including  com- 
missions, and  is  credited  with  gross  sales  less  brokerage.    Assess- 
ments, dividends,  interest,  etc.,  are  charged  or  credited,  as  the 
case  may  be,  directly  to  Profit  and  Loss.    Miscellaneous  Expense 
is  charged  with  postage,  stationery,  cost  of  market  reports,  etc. 
Once  a  year  X   takes  inventory  of  securities  on  hand  at  cost 
(ignoring  accrued  interest  and  dividends)  and  figures  his  profit 
or  loss,  transferring  to  his  capital  account  any  balance  of  the 
Profit  and  Loss  account  which  is  not  drawn. 
His  trial  balance  on  Dec.  31,  is  as  follows: 

Cash    $44,800 

Miscellaneous  Expense   200 

Securities    $  5.000 

Profit  and  Loss 3.000 

X,  Capital 37.ooo 

$45,000        $45,000 


86  PROBLEMS  AND  EXERCISER 

The  inventory  of  securities  on  hand  Dec.  31,  1920,  is  $10,000. 
X  withdraws  one-half  of  his  profits  in  cash  for  Hving  expenses 
(which  are  not  recorded  in  his  business  accounts),  and  the  bal- 
ance is  transferred  to  his  capital  account. 

Prepare  the  journal  entries  necessary-  to  close  X's  accounts 
as  of  Dec.  31,  1920,  and  show  all  five  acounts  as  they  would  ap- 
pear when  closed.  In  exhibiting  the  Securities  account  assume 
purchase  and  sale  figures  for  the  year  consistent  with  the  data  of 
the  trial  balance. 

50. 

(Forms  B  and  C) 

A  and  B,  equal  partners,  start  business  with  a  stock  of  goods 
worth  $1,200.  During  the  first  month  additional  goods  are 
bought  on  account  from  the  X  Co.  to  the  amount  of  $2,800.  Sales, 
all  for  cash,  total  $3,000.  Rent  is  paid  $210  (this  covers  the  cur- 
rent month  and  two  months  in  advance).  The  salesman's  salary 
is  paid,  $150.    Miscellaneous  expenses  are  paid,  $40. 

Set  up  this  data  in  skeleton  accounts  using  the  following 
titles:  (i)  A,  Capital;  (2)  B,  Capital;  (3)  Merchandise  Inven- 
tory; (4)  Purchases;  (5)  X  Co.;  (6)  Sales;  (7)  Cash;  (8)  Rent; 
(9)  Salaries;  (10)  Miscellaneous  Expenses. 

At  the  end  of  the  month  merchandise  on  hand  amounts  to 
$2,200.  Using  (11)  an  Expense  and  Revenue  account  and  (12) 
a  Net  Revenue  account,  close  the  accounts  of  this  business,  as- 
suming that  the  partners  withdrew  $200  each  in  profits  and  that 
the  balance  of  Net  Revenue  is  carried  to  the  partners'  capital 
accounts.  (Give  journal  entries,  post,  and  rule  the  accounts  as 
closed. 


IX 


THE  PREPARATION  OF  STATEMENTS 

I. 

Name  the  three  important  accounting  statements  and  explam 
their  uses.  State  particularly  whose  interests  are  to  be  served  by 
each  one. 

The  Expense  and  Revenue  Statement 

2. 

C.  J.  Rankin,  Trial  Balance,  April  30,  1916 

Store  Equipment   $    660.00 

Delivery  Equipment    1,380.00 

Cash   258.40 

Notes  Receivable  3i5-00 

Mdse.  Inventory 2,120.00 

C.  T.  Rankin,  Capital $4,i30-00 

Notes  Payable    1,025.00 

Purchases 2,297.00 

Sales   2,430.75 

Store  Salaries 3i3-00 

Advertising   5-20 

Delivery  Expense 70,20 

Rent   iio-oo 

Insurance  54-00 

Heat  and  Light 16.20 

General  Expense   --7  a 14-85 

Gash  Discounts  on  PurchasesTJ^'..'." ^6.60 

Accounts  Receivable  .". '• 732-50 

Accounts  Payable 744-00 

$8,346.35         $8,346.35 


88  PROBLEMS  AND  EXERCISES 

Inventories : 

Merchandise   $2,082.27 

Salaries  earned  but  unpaid : 

Sales   clerks    15-67 

Driver 5.00 

The  insurance  balance  represents  payment  for  one  year 
from  March  i,  191 6. 

Delivery  equipment  1,360.00 

Store  equipment 660.00 

Prepare  an  expense  and  revenue  statement  in  account  form 
(Form  C).    In  report  form  (Form  B). 

3- 

(Form  B) 

The  following  trial  balance  is  taken  from  the  ledger  of  S.  J. 
Burdick  at  the  close  of  one  month.  The  merchandise  inventory 
is  $3,080. 

Dr.  Cr. 

Equipment  $   980 

Cash  820 

Merchandise    4,200 

Accts.  Receivable 338 

Accts.  Payable   $1,850 

S.  J.  Burdick 3,250 

Salaries 130 

Rent   60 

Heat  &  Light 12 

General  Expense   45 

Sales  1,485 

$6,585         $6,585 
Prepare  an  expense  and  revenue  statement  in  report  form. 


PREPARATION  OF  STATEMENTS  89 

4- 

(Form  B) 
Trial  Balance  of  Andrew  Jackson  as  of  June  30,  1914- 

Mdse.  (per  inventory  Jan.  i)   $  7,000 

Cash  (on  hand  and  in  bank) 400 

Customers'  Accounts 3'200 

Creditors'  Accounts ?  2,400 

Purchases I3>500 

Sales  18,000 

Salaries i'840 

Rent   820 

Advertising   500 

Heat  and  Light 300 

Insurance  (Premium  for  year  1914) ^^^ 

General  Expense   4°^ 

Andrew  Jackson,  Capital 7,66o 

$28,060         $28,060 

Inventory  of  Mdse.  on  hand  June  30 $7,400 

Coal  on  hand 40 

Salaries  unpaid  June  30 45 

From  the  preceding  trial  balance  and  additional  data,  present 
an  expense  and  revenue  statement  in  report  form. 

5. 

(Form  B) 
Trial  Balance — Month  of  March— 1914. 

Equipment  ?   "50 

Cash   150 

Notes  Receivable  50 

Unexpired  Insurance    3^ 

Proprietor    $1,000 

Notes  Payable   20O 


go  PROBLEMS  AND  EXERCISES 

Salaries 128 

Rent    40 

Heat  and  Light 4 

Merchandise  Inventory 400 

Purchases    700 

General  Expenses    6 

Sales   800 

Accounts  Receivable   150 

Accounts  Payable 314 

$2,314        $2,314 

Mdse.   Inventory    $520 

Salaries  Accrued   10 

Expenses  Accrued  3 

Prepare  an  expense  and  revenue  statement  in  report  form. 

(Form  B) 
Trial  Balance,  January  31,  191 5. 

Dr.  Cr. 

Real  Estate $  4,000 

Store  Equipment   500 

Stable  Equipment    800 

Cash    400 

Notes  Receivable  300 

A.  Customer 200 

B.  Customer  150 1^"*' 

C.  Customer   50 

S.  Creditor $      500  ^ 

M.  Creditor 800  j- 

N.  Creditor 700J 

Notes  Payable   3,800 

H.  Henry,  Proprietor 15,000 

Merchandise  Inventory  (Jan.  i,  1915) 14,400 

Sales   9,000 

p2  >S  •  «i  ' 


»s 


PREPARATION  OF  STATEMENTS  91 

Purchases ..^..._...     7,000  ^A' 

Salaries  /! ^:^::.■. :.... T:. .'. .7: T. :.:.". .     820 

Advertising    250 

Delivery  Expense 180 

Rent    360 

Heat  &  Light  46 

Insurance  I44 

General  Expense   260 

Cash  Discount    .  /«r?^^^.»H:Wt-:v^  .S  •. 60 

$29,860         $29,860 
Additional  Data :  >  %  'f^'^"        '^l '  '  " 

Alerchandise   inventory    $14,670 

Feed  for  horses 20 

r'Salaries  accrued   40 

;  Delivery  boy's  salary  accrued 10 

Insurance  represents  payment  for  one  year. 

Prepare  an  expense  and  revenue  statement  in  report  form. 


(Form  B) 

The  retail  merchant  usually  inventories  his  stock  of  goods 
at  the  invoice  price  either  of  the  date  of  purchase  or  of  the 
date  of  inventory.  This  method  fails  to  take  into  account  the 
fact  that  a  considerable  part  of  the  "expense"  outlays  may  be 
reasonably  charged  to  the  unsold  goods.  Explain  the  effect  of 
this  practice  on  the  current  expense  and  revenue  statement.  Can 
you  justify  current  practice  in  this  regard? 

8. 

Prepare  classified  expense  and  revenue  statements  from  the 
analysis  sheets  worked  out  in  Problems  28,  33,  34,  and  35,  follow- 
ing. 


92  PROBLEMS  AND  EXERCISES 

Thk  N%r  Re:venue  and  Surplus  Statement 


"The  net  revenue  statement  reflects  the  financial  poHcy  of  a 
corporation,  particularly  in  respect  to  the  distribution  of  risk 
among  the  permanent  investors."    Explain. 

10. 

(Form  B) 

Prepare  a  net  revenue  statement  from  the  following  data: 

Expense  and  Revenue  has  a  credit  balance  of $4,380 

Interest  Paid  shows  a  balance  of 260 

Interest  Received  has  a  balance  of 50 

Dividends  were  declared  and  paid  during  the  period 750 

Dividends  are  declared 750 

Taxes  shows  a  debit  balance 180 

Taxes  are  accrued  but  unpaid 570 

Interest  on  notes  payable  is  accrued 120 

Interest  receivable  is  accrued  15 

Bond  Interest  shows  a  debit  balance 300 

Bond  interest  is  accrued 150 

Rent  receivable  accrued  40. 

II. 

*Tn  the  case  of  the  sole-proprietorship  and  partnership 
there  are  usually  few  net  revenue  and  surplus  items.  In  fact  the 
current  practice  of  combining  all  expense,  revenue  and  net  revenue 
charges  and  credits  into  a  single  "profit  and  loss"  statement  is  not 
without  justification  in  such  cases." 

Argue  in  support  of  this  statement.  Show,  on  the  other 
hand,  that  quite  a  dififerent  conclusion  should  be  reached  in  the 
case  of  the  corporation. 


PREPARATION  OF  STATEMENTS  93 

12. 

(Form  B) 

Prepare  a  net  revenue  and  surplus  statement  from  each  of 
the  cohimnar  sheets  you  work  out  in  Exercises  20,  26,  27,  and  28, 
following. 

The  Balance  Sheet 

13. 

This  statement  is  frequently  made  by  accountants :  "'the  bal- 
ance sheet  is  the  most  important  financial  statement."  Explain 
the  construction  of  the  balance  sheet  and  show  why  the  statement 
in  the  quotation  marks  is  true. 

(Form  C) 
Prepare  balance  sheets,  in  account  form,  for  problems  2  to 
6,  above. 

15. 

(Form  B) 
Trial  Balance  of  John  Smith  as  at  :March  31,  1914,  after  one 
month's  operation. 

Store  and  Office  Equipment $      289.85 

Dehvery  Equipment    275.00 

Cash    1,079-04 

Accts.  Receivable 320.00 

Notes  Receivable   100.00 

Notes  Payable    $  3,000.00 

Accounts   Payable    923-50 

John  Smith,  Capital 5,000.00 

John  Smith,  Personal  10.00 

Sales  1,601.75 

Purchases    8,085.00 

Salaries    190.001/ 


94  PROBLEMS  AND  EXERCISES 

Delivery  Expense    91.00 

Rent   60.00 

Heat  &  Light  36.00  *^ 

0 


Insurance  &  Taxes  40.00*  / 

Office  &  Store  Supplies 46.00 


Interest  on  Notes  Payable 10.00 

General  Expense   1.60 

Cash  Discount  on  Purchases 88.24 

$10,623.49        $10,623.49 

Supplementary  Data: 

Merchandise  Inventory,  March  31 $6,850.00 

Insurance  premium  has  been  paid  for  one  year  1 

Inventory  of  office  supplies •'30.00 

Salaries  accrued,  but  not  paid 10.00 

Light  bill  for  month  unpaid *'8.oo 

Salary  due  delivery  boy V4.00 

Coal  on  hand  ^i5-00 

The  balance  of  Notes  Receivable  represents  a  single  note 
received  on  March  11,  and  bearing  6%  interest. 

Prepare  expense  and  revenue  statement  and  balance  sheet  in 
report  form. 

16. 

(Forms  B  and  C) 

The  following  is  taken  from  the  daybook  of  J.  A.  Ralston, 
a  retailer.  Journalize  these  data,  showing  account  titles  and 
amounts  but  omitting  explanation. 

Jan.  I.  J.  A.  Ralston  invested  in  business,  cash,  $1,500,  and 
goods,  $2,000;  rent  was  paid,  $40;  merchandise  was  bought  on 
account  from  Wilson  &  Co.,  $1,200. 

Jan.  2.  Cash  sales,  $300;  office  stationery  and  supplies  were 
purchased  for  cash,  $40;  goods  were  sold  to  A.  H.  Campau  to  the 
amount  of  $250,  he  paying  $50  down ;  office  furniture  and  type- 
writer were  purchased  for  cash.  $100. 


PREPARATION  OF  STATEMENTS  95 

Jan.  3.  Payment  of  $500  was  made  to  Wilson  &  Co.,  on 
account ;  J.  R.  Ralston  took  merchandise  out  of  stock  for  his  own 
use  which  had  a  cost  value  of  $30;  payment  was  made  for  adver- 
tising, $10;  cash  sales,  $260. 

Jan.  4.  A.  H.  Campau  returned  goods  with  a  cost  value  of 
$10  (selling  value  of  $15)  which  he  claimed  were  unsatisfactory; 
goods  were  sold  to  Harvey  Wachs,  $200,  payment  being  made  as 
follows,  cash  $60;  H.  A.  Shimmy's  note  for  $40  drawn  in  favor  of 
Wachs ;  the  balance  on  account ;  sales  for  cash,  $250. 

The  inventory  of  merchandise  at  this  date  is  $2,280;  pre- 
paid rent,  $30 ;  supplies  on  hand  total  $30.  It  is  necessary  to  close 
the  books  at  this  time  as  S.  E.  Ralston  is  to  be  taken  in  as  an 
equal  partner  on  Jan.  5. 

Post,  prepare  trial  balance,  make  closing  journal  entries,  and 
construct  a  balance  sheet. 

S.  E.  Ralston  contributes  cash  equal  to  the  entire  net  amount 
of  J.  R.  Ralston's  equity  as  it  appears,  after  closing,  Jan.  5. 

Give  entries  showing  this  new  investment,  post,  and  exhibit  a 
new  balance  sheet. 

17- 
(Form  B) 

From  the  following  trial  balance  and  supplementary  data  pre- 
pare expense  and  revenue  and  balance  sheet  statements  in  report 
form : 

Trial  balance  of  Hewett  &  Son  as  at  March  31,  19 19,  after 
three  months'  operation : 

Dr  Cr. 

Store  and  Office  Equipment $      300 

Deliver}^  Equipment 400 

Cash    1,050 

Accounts  Receivable 400 

Accounts  Payable $      900 

A.  L.  Hewett,  Capital 2,000 

Thomas  Hewett,  Capital 6,000 

Thomas  Hewett,  Drawing 20 


g6  PROBLEMS  AND  EXERCISES 

Sales i»6oo 

Purchases 8,000 

Salaries    19^ 

Delivery  Expense no 

Rent    60 

Heat  and  Light 30 

Insurance  40 

Supplies    40 

General  Expense    10 

Discounts  on  Purchases 150 


$10,650  $10,650 
Additional  Data : 
(i)  Merchandise  in  stock,  valued  at  invoice  cost,  including 
freight,  $6,900.  (2)  Present  value  of  store  and  office  equipment, 
$300;  of  delivery  equipment,  $390.  (3)  Estimated  worthless  ac- 
counts, S50.  (4)  Salary  payable  to  A.  L.  Hewett,  as  manager, 
$95-  (5)  Dehver>'  man's  wages  accrued,  Sio.  (6)  Rent  payable, 
$30.  (7)  Fuel  on  hand,  $10;  light  bill  unpaid,  $5.  (8)  Supplies 
on  hand,  $30.  (9)  It  is  estimated  that  20%  of  delivery  expense 
(per  trial  balance)  is  applicable  to  goods  in  stock.  (10)  The  in- 
surance account  represents  one  year's  insurance,  paid  Jan.  i,  1919. 

18. 

(Form  C) 
A,  a  trader,  comes  to  Ann  Arbor  with  $600  in  cash  which  he 
deposits  in  a  bank.  He  rents  a  store,  paying  a  month's  rent,  Sioo, 
in  advance.  He  buys  goods  on  account  from  B,  a  local  whole- 
saler, $2,500.  He  pays  $300  for  advertising,  and  at  the  end  of  the 
month  still  owes  $200  on  this  account.  He  pays  in  cash,  $50, 
cost  of  carting  goods  to  his  store.  He  sells  for  cash,  $3,000,  goods 
which  cost,  including  the  proper  proportion  of  cartage  ($25), 
$1,275.  His  delivery  expenses  for  the  month  amount  to  $200.  He 
hires  a  salesman  for  10  days  at  S8  per  day.  A  gives  his  entire 
time  to  the  business  and  he  considers  his  services  worth  $25  per 


PREPARATION  OF  STATEMENTS  97 

day.    He  pays  B  during  the  month  $1,900.    Light  and  telephone 
bills  are  paid,  $15. 

Set  up  in  accounts  and  prepare  expense  and  revenue  state- 
ment and  balance  sheet  in  account  form. 

19. 

(Form  B) 
Prepare  a  classified  balance  sheet  from  each  of  the  analysis 
sheets  you  work  out  in  Problems  22-25,  28,  29,  33,  34,  and  35,  fol- 
lowing. 

The  Ten-Column  Statement 

20. 

(Form  E) 
The  following  is  the  trial  balance  of  the  Boulder  Manufactur- 
ing Co.,  as  at  Dec.  31,  1917. 

Plant  and  Equipment $100,000 

Raw  Materials  (Inv.  Jan.  i) 35.ooo 

Raw  IMaterials  Purchases   95.000 

Goods  in  Process  (Inv.  Jan.  i)  30,000 

Finished  Goods  (Inv.  Jan.  i)   25,000 

Cash   6,000 

Accounts  Receivable   125,000 

Capital  Stock   $200,000 

Notes  Payable 25,000 

Accounts  Payable    64,000 

Labor,  Direct   210,000 

Labor,   Indirect    35.ooo 

Manufacturing  Expense 96,000 

General  Expense   25,000 

SelHng  Expense   41,000 

Interest i'0<^ 

Sales   510,000 

Undivided  Profits ^5>ooo 

$824,000        $824,000 


98  PROBLEMS  AND  EXERCISES 

Inventories,  Dec.  31. 

Raw  materials $42,000 

Goods  in  process 27,000 

Finished  goods    28,000 

Manufacturing  expense  accrued 450 

Accrued  payroll  not  paid 1,600 

($1,200  direct  and  $400  indirect  labor) 

Interest  accrued 500 

Estimated  income  and  profits  taxes  ac- 
crued           500. 

A  depreciation  rate  of  57c  should  be  applied  to  plant  and 
equipment. 

Prepare  a  ten-column  statement. 

21. 
(Form  E) 
Prepare  a  ten-column  statement  from  the  following  trial  bal- 
ance and  inventories :  Dr,  Cr.         Inventories 

Capital  Stock $100,000 

Notes  Payable  50,000 

Leaseholds $  25,000  $  19,500 

Allow,  for  Depr.  of  Leases.  .  .  5,000 

Plant  and  Equipment 105,000  93,000 

Allow,  for  Depr.  PI.  and  Eq.  .  6,000 

IMerchandise  and  Supplies 40,000  42,000 

Accounts  Receivable 90,000  90,000 

Accounts  Payable   80,000 

Sales 100,000 

Purchases 50,000 

Payroll   20,000  1,500 

Expense  Accounts 15,000  500 

Taxes 3,ooo 

Interest   3,ooo 

Dividends    2,000 

Undivided  Profits   4,ooo 


$345,000         $345,000 


PREPARATION  OF  STATEMENTS 


99 


22. 

(Form  E) 

Prepare  a  ten-column  statement  from  the  following  trial  bal- 
ance and  inventories : 

Trial  Balance,  December  31,  1920 

Dr.  Cr. 

Land $  30,000        $     5,000 

Buildings  and  Fixtures 55,ooo 

Allowance  for  Depreciation 4oOO 

Inventory,  Dec.  31,  1919 20,000 

Purchases   70,000 

Payroll   25,000 

Supplies   3,000 

Transportation 4,000 

Purchases  Discounts   1,500 

Sales   1 50,000 

Farmers  and  ^lechanics  Bank 21,500 

Interest  and  Dividends 2,000               3,000 

Curtis  Publishing  Company 6,000 

Xotes  Payable 30,000 

S.  O.  Sisson,  Capital 87,200 

S.  O.  Sisson,  Current 1,500 

Creditors'  Ledger 35-000 

Repairs 500 

Customers'  Ledger 40,000 

Insurance i  ,200 

Securities   30,000 

Sales  Allowances 1,000 

Commissions — X 5, 000                 500 

Miscellaneous  Expense   6,500 

Advertising    6,500 


$322,700         $322,700 


lOo  PROBLEMS  AND  EXERCISES 

Additional  Data,  December  31,  1920: 

(i)  The  credit  to  land  represents  the  sale  of  a  lot  which  cost 
$4,000  (and  was  carried  on  the  books  at  that  figure.)  The  net 
present  value  of  buildings  and  fixtures  is  estimated  at  $48,000. 
(2)  Merchandise  on  hand,  $10,000.  (3)  Wages  payable  total 
$1,000.  (4)  Supplies  on  hand,  $500.  (5)  Freight  bills  unpaid, 
$600.  (6)  Interest  accrued  on  notes,  $500.  (7)  Unexpired  in- 
surance, $100.  (8)  Accrued  taxes  are  estimated  at  $1,500.  (9) 
On  June  30,  1920,  Mr.  Sisson  leased  a  part  of  his  building  to  X 
for  $1,000  per  year,  payable  Dec.  31.  X  handles  a  considerable 
part  of  Sisson's  business  on  a  commission  basis.  In  lieu  of  pay- 
ing the  rent  due,  X,  on  Dec.  31,  1920,  gives  Sisson  a  receipt  for 
$500  for  commissions  on  prospective  192 1  business.  (10)  On 
March  31,  1921,  Mr.  Sisson  will  receive  a  check  for  $500  from 
the  Western  R.  R.  Co.,  covering  six  months'  interest  on  some 
bonds  which  he  holds.  (11)  Included  in  the  securities  account 
are  bonds  of  the  former  Russian  government  which  are  now  con- 
sidered worthless.    These  bonds  are  on  the  books  at  $2,000. 

23. 

(Form  E) 

A  &  B,  partners,  began  business  Jan.  i,  1919.  They  have 
already  closed  their  books  once,  Dec.  31,  1919.  The  following  is 
the  partnership  trial  balance,  taken  before  closing,  Dec.  31,  1920. 

Dr.  Cr. 

Plant  and  Machinery   $  50,000 

Allow,  for  Deprec.  of  P.  and  M $     5.000 

Furniture  and  Fixtures 7,000 

Allow,  for  Deprec.  of  F.  and  F 350 

Advertising   2,000 

Purchases,  Materials  and  Supplies 200,000 

Factory  Payroll 250,000 

Accounts  Receivable 30,000 

Allowance  for  Doubtful  Accounts 500 


PREPARATION  OF  STATEMENTS  loi 

Light  Heat  and  Power 20,000 

Cash    "3,650 

Salesmen's  TraveHng  Expense 6,000 

Accounts  Payable       160,000 

Insurance  on  Plant  and  Machinery 1,200 

Interest  on  Mortgage 1,000 

Interest,  Notes  Receivable  2,000 

A,Capital 76.000 

B,  Capital 2^'°^ 

Notes  Receivable   75,ooo 

Materials  and  Supplies  Inventory,  1/1/ 20.  15,000 

Finished  Stock  Inventory,  i/i/'20 20,000 

Sundry  Factory  Expense 7,ooo 

Mortgage  on  Plant  and  Machinery 20,000 

Sales  Allowances   i'500 

Insurance  on  Stock  and  Fixtures i  ,000 

Freight — Inward ^'Ooo 

Finished  Goods  Sales 550,ooo 

Rent— Land  and  Office 7,500 

Office  and  Other  Salaries 25,000 

Sundry  Sales  and  Office  Expense r,ooo 

$834,850         $834,850 

Supplementar}^  Information,  Dec.  31,  1920: 

(i)  Depreciate  plant  and  machiner}^  at  the  rate  of  10%  of 
cost  per  annum,  and  furniture  and  fixtures  at  5%.  There  have 
been  no  abandonments  or  additions  since  the  business  started. 
(2)  Unpaid  and  unbooked  advertising  bills  amount  to  $200.  (3) 
Accrued  factory  payroll  is  $2,000.  (4)  Of  the  credit  sales  for 
the  period,  $300,000,  it  is  estimated  that  1%  is  uncollectible.  (5) 
Fuel  on  hand,  $500;  light  bill  unpaid,  $300.  (6)  Salesmen's  ex- 
pense vouchers  received  but  not  booked,  $500.  (7)  Plant  and 
equipment  was  insured  for  three  years  beginning  Jan.  i,  1919, 
at  a  cost  of  $1,800.      (8)    The  mortgage  carries  5%   and   six 


I02  PROBLEMS  AND  EXERCISES 

months'  interest  is  accrued.  (9)  Interest  accrued  receivable 
totals  $1,000;  one  note,  amounting  to  $10,000,  is  considered  worth- 
less because  of  the  insolvency  of  the  maker,  and  is  written  off. 
(10)  Materials  and  supplies  on  hand,  $20,000;  finished  stock  on 
hand,  $25,000.  (11)  Unexpired  insurance,  stock  and  fixtures, 
amounts  to  $200.  (12)  Inward  freight  included  in  present  in- 
ventories of  materials  and  finished  goods  (as  given  under  (10) 
above),  totals  $200.  (13)  A  quarter's  rent  (Oct.  to  Dec.  1920) 
is  payable  Jan.  i,  1921. 

Prepare  a  ten-column  statement. 

24. 

(Form  E) 

The  following  is  a  trial  balance  of  the  books  of  Harden  and 
Roberts  for  the  last  quarter  of  1917.  (Assume  that  the  hooks 
have  bee7i  properly  closed  on  the  last  day  of  the  preceding  qucirt- 
er.) 

Dr.  Cr. 

Bank  Account $155,000  $120,000 

Petty  Cash 1,000  500 

Customers'  Accounts 140,000  90,000 

Allowance,  Bad  Accounts 500  i  ,000 

iVIerchandise  Stock 5j500 

Equipment 3..500  500 

Buildings    15,000 

Allowance,  Depr.  of  Bldgs.  and  Equip 500  3,000 

Real  Estate  85,000 

Notes  Payable 5,ooo  35,ooo 

Interest  Payable 250  1,575 

Creditors'  Accounts 80,000  95,ooo 

Purchases   95,ooo 

Sales 150,000 

Rents  500  5,000 

Advertising    2,500 

Sales  Commissions 3,000 


PREPARATION  OF  STATEMENTS  103 

Payroll  6,000               i  ,000 

General  Expense 10,000                 500 

Supplies   1,500 

Office  Salaries 9,000 

Insurance 500 

Discounts  and  Allowances 500 

Harden,  Capital   50.025 

Roberts,  Capital 50,650 

Reserve  for  Accrued  Taxes 15.000 


$619,250        $619,250 

Supplementary  Data: 

(i)  There  is  a  shortage  in  petty  cash,  $10.  (2)  It  is  es- 
timated that  of  the  credit  sales  for  the  period  ($120,000)  J^  of 
1%  is  uncollectible.     (3)   Merchandise  on  hand,  12/31,  $5,000. 

(4)  Equipment  and  buildings  are  depreciable  at  the  rates  of  12% 
and  4%,  respectively,  per  annum;  the  depreciation  for  this  period 
to  be  computed  on  the  basis  of  gross  book  values  as  of  Dec.  31. 

(5)  All  of  the  notes  payable  draw  interest  at  6% ;  the  charge  of 
$5,000  represents  the  face  of  a  note  paid  with  interest  Oct.  31 ; 
there  have  been  no  other  adjustments  of  this  account  or  interest 
payments  since  Dec.  31,  1916.  (6)  Advertising  materials  on 
hand,  $200.  (7)  Wages  are  unpaid,  $500.  (8)  Telephone  and 
other  current  bills  unpaid,  $100.  (9)  Supplies  on  hand  total  $500. 
(10)  On  Jan.  i,  1917,  the  partners  took  out  fire  and  other  insur- 
ance policies  for  the  year;  at  the  beginning  of  the  year  there 
was  no  insurance  outstanding;  and  there  have  been  no  payments 
for  insurance  since  Jan.  i.  (11)  Property,  income,  and  excess- 
profits  taxes  for  the  year  have  been  estimated  at  $20,000.  (12) 
On  Dec.  31  rents  on  the  firm's  realty  holdings  are  prepaid,  $100, 
unpaid,  $300. 

Prepare  a  ten-column  statement. 


104  PROBLEMS  AND  EXERCISES 

25- 

(Form  F) 
Fill  in  the  omitted  figures  in  the  following  columns,  using  no 

data  not  given  or  implied. 

Trial  Balance  Balance  Sheet       Expense  and 

Revenue 

Accounts Dr.  Cr.         Assets  Equities       Dr.         Cr. 

Cash $     5,500  $  50 

Land 10,000  $10,000 

Equipment 10,000 

Allow,  for  Dep. 

of  Equip $     1.200  $1,800 

Gen.  Expense .  . .         8,000 

Commissions  .  . .  700  ^-^^  ?    95° 

Accts.  Payable . .  i5>ooo 

Rent 300  100 

Mdse.  Inv 4,000 

Purchases  .....        15,000 

Sales 50,000 

Labor 12,000  500 

Accts.  Rec 40,000  ^'^ 

Proprietor 37,300 

Net  Revenue  .  . . 

Totals $104,500     $104,500     $67,000 

26. 

(Form  E) 
Prepare  a  ten-column  statement  from  the  following  ledger 
account  balances  and  inventories. 

Ledger  Balances     Inventories 

Factory  Site   $  80,000  $  80,000 

Buildings  and  Equipment 251,000  222,000 

IVIachinery  and  Tools   224,000  213,000 

Transportation  Equipment 19,000  17.500 


PREPARATION  OF  STATEMENTS  105 

Capital  Stock   500,000 

Accounts  Receivable   51,000  48,000 

Notes  Payable    78,400 

Investment  in  Stocks 42,000  46,000 

Finished  Goods 66,000  65,000 

Goods  in  Process 45,ooo  57,ooo 

Materials  and  Supplies 57,ooo  29,000 

Accounts  Payable    59,8oo 

Sales   68,000 

Cash    36,400  36,200 

Interest 2,700  i,ioo(Cr.) 

Dividends  Received 8,000 

Bonds   100,000 

Dividends  Payable 8,000 

Undivided  Profits 99,000 

Reserve  for  Dep.  of  Fixed  Assets. . .  .     26,700 

Labor  27,200  8oo(Cr.) 

General  Expense   32,600 

Loss  by  Fire 14,000 

Comment  on  the  accounting  policies  and  financial  success  of 
this  enterprise. 

27. 
(Form  E) 

Dr.  Cr.  Inventory 

Land    $  40,000  $  40,000 

Buildings  75,000 

Allow,  for  Dep.  of  Bids....  $  15,000 

Improv.  on  Leased  Prop. . .  .       6,000  6,000 

Machinery    20,000 

Allow,  for  Dep.  of  Alach...  10,000 

Tools   1 ,000  900 

Patents    7,.500  7,000 

Lease 17,000  16,000 

Materials : 

Inventory    55,ooo  58,000 

Purchases    80,000 


io6                          PROBLEMS  AND  EXERCISES 

Sales  250,000 

Cash    17,000 

Labor    25,000                            2,ooo(Cr.) 

Insurance 4,000                               1,000 

Commissions    5,ooo 

Purchase  Discounts   3,ooo 

Sales  Discounts 2,000 

Advertising 1,000                                100 

Freight  &  Cartage 500 

Power,  Heat  &  Light 8,000 

Salaries   7,000 

Bond  Interest    8,000                             2,ooo(Cr.) 

Commercial  Interest 600                                300 

Repairs  for  Machinery   ....  1,000 

Extension  to  Building 4,000                             4,000 

Expense    5,ooo 

Loss  by  Fire  500 

.Taxes  900                          25,ooo(Cr.) 

Stock  in  X  Co 235,000                         235,000 

Notes  Receivable    12,000                            12,000 

Accts.  Receivable   38,000                          34,ooo 

Allow,  for  Bad  Debts 2,000 

Rent    2,000             200 

Furniture  &  Fixtures 5,ooo                             4,800 

Capital  Stock 150,000 

Surplus    25,000 

Dividends   4,000  (Cr.) 

Dividends  on  X  Co.'s  Stock.  16,000 

Notes  Payable 20,000 

Accts.  Payable 38,000 

Bonds    150,000 

$681,000    $681,000 

From  the  above  trial  balance  and  inventories  of  the  Y  Co., 
Dec.  31,  1920,  prepare  a  ten-column  statement.  Depreciate  build- 
ing 5%  of  gross  valuation  and  machinery  10%. 


PREPARATION  OF  STATEMENTS  107 

28. 

(Form  E) 

The  Western  Gas  Engine  Co. 
Trial  balance  taken  Dec.  31,  1919.    (Six  months  period.) 

Land  $  15,000 

Factory  Building  23,600 

Resen^e  for  Depr.  of  Factory $     1,840 

Warehouse 3'0O0 

Reserve  for  Depr.  of  Warehouse 240 

Machinery  &  Equipment 80,000 

Reserve  for  Depr.  of  Mach.  &  Equip 16,000 

Small  Tools 4,850 

Office  Equipment  1,050 

Resen-e  for  Depr.  of  Office  Equip 80 

Raw  Materials  (Inventor}'  July  i) 75,ooo 

Goods  in  Process  (July  i,  1919)  24,500 

Cash   18,000 

Accts.  Receivable 78,000 

Reserve  for  Bad  Debts 270 

Notes  Receivable  7,850 

Interest  on  Notes  Receivable 58 

Purchases   (Raw  Materials) 280,000 

Purchase  Returns 2,000 

Purchase  Allowances    680 

Cash  Discount  on  Purchases 3.400 

Inward   Freight    4,200 

Finished  Goods   (Inventory  July  i) 17,500 

Sales  410,300 

Sales  Returns  7,8oo 

Sales  Allowances   270 

Outward  Freight   220 

Sales  Discounts 2,400 

Accounts  Payable    60,000 

:Mortgage  Payable   40,000 

Notes  Pavable 25,000 


io8  PROBLEMS  AND  EXERCISES 

Interest  on  Notes  Payable 500 

Direct   Labor    40,980 

Indirect  Labor   7,250 

Heat  &  Light 2,490 

Power    3780 

Repairs  to  Machinery 2,650 

SuppHes,  Oil  &  Waste  (Purchased) 814 

Insurance  on  Building   144 

Insurance  on  Machinery 390 

Insurance  on  Material   450 

Liability  Insurance   328 

Superintendence   2,150 

Manufacturing  Office  Salaries   2,460 

Reserve  for  Taxes 240 

Truckage   Expense    1,167 

Shipping  Expense   780 

Sales  Office  Expense 1,900 

Traveling  Salesmen's  Salaries   20,500 

Traveling  Salesmen's  Expense 2,050 

Advertising    4,250 

Postage  &  Stationery   1,860 

General  Office   Salaries    3,000 

General  Office  Expense   800 

Capital  Stock   150,000 

Surplus    34,105 

Dividends  Unclaimed   200 


$744,173         $744  173 

Inventories  and  Adjustments,  Dec.  31,  are  as  follows: 

Goods  in  process ^2y,y20 

Raw  materials  70,000 

Supplies,  oil  and  waste 132 

Finished  goods    19,900 

Small  tools    2,530 

Interest  accrued  on  mortgage  payable 1,200 


PREPARATION  OF  STATEMENTS  109 

Payroll  accrued — direct  labor    1,650 

Payroll   accrued — indirect   labor 230 

Reserve  for  estimated  loss  on  bad  debts 2,011     ^-^^^  >Ww> 

Interest  accrued  on  notes  payable 244 

Accrued  interest  on  notes  receivable 25 

Unexpired  insurance : 

on  building 12 

ffr^i^~*f  e^i'    Q^  machinery I95 

on  materials 225 

liability  insurance   164 

Estimated  federal  taxes i.ooo 

Depreciation  of  factory  building,  warehouses  and  office 
equipment  is  estimated  at  the  rate  of  4%  per  annum ;  machinery 
is  depreciated  at  a  10%  rate. 

A  semiannual  dividend  of  47c  is  declared  on  capital  stock. 
Prepare  a  ten-column  statement. 

29. 

(Form  E) 
Prepare  a  ten-column  statement  from  the  following  trial  bal- 
ance and  inventories. 

Trial  Balance  Inventory 

Land  Property    $  17,000  $  18,000 

Warehouse    10,100  9,800 

Store   Building    22,700  21,900 

Notes  Receivable    8,400  $     5,800           2,600 

Warehouse   Equipment    700  650 

Store  and  Office  Fixtures 3,600  400           3,100 

Notes  Payable  5>ooo  25,000 

Accounts  Payable  11,900  22,600 

Cash    18,200  13.900           4,300 

DeHvery  Equipment   2,400  2,200 

^^'ages  and  Salaries 8,900  Cr.      200 

Fuel   800  200 

Rebates  and  Allowances   1,200 


I  lo  PROBLEMS  AND  EXERCISES 

Sales   Discounts    i,6oo 

Western  Supply  Co 1,300         14,200 

The  Buckley  Co 2,200         38,500 

Roggers  and  Wilson 2,200        40,600 

Purchase  Discounts    900 

Purchases 61,000 

Merchandise  Inventory   18,300                           38,500 

Delivery  Supplies   400                                 100 

Advertising 250 

Miscellaneous  Expense    3,900 

Office   Supplies    650                                350 

Gross  Sales   82,400 

Freight  and  Express   950 

Accounts  Receivable 48,600         32,500         14,400 

Interest  Paid  1,100                                700 

Interest  Received   240                40 

Insurance    2,400                              1,700 

Rent    1,050              500 

Tax  Reserve 200          2,300 

Damage  Claims  3,300 

Agency  Contracts  21,640                           21,640 

$279,490    $279,490 

'What  is  the  peculiarity  of  ownership  in  this  case?    Comment 
on  any  other  special  features  which  you  obser\'e  in  this  problem. 

The  Working  Sheet 

30. 

(Form  E) 

Trial  Balance  of  S.  Y.  Merkle,  Dec.  31,  1915. 

Cash    $  12,250 

Notes  Receivable  32,700 


PREPARATION  OF  STATEMENTS  m 

Accounts  Receivable  47,000 

Furniture  &  Fixtures  3,000 

Building   13,000 

Real  Estate 50,000 

Notes  Payable   $  30,000 

Accounts  Payable    13,210 

Advertising    2,600 

Commissions    3,050 

Expense   12,900 

Salaries  and  Wages 9,300 

Insurance   625 

Postage    1,315 

Cash  Discount  on  Purchases 55^ 

Exchange  25 

Interest    175 

Cash  Discount  on  Sales 375 

S.  Y.  Merkle,  Personal 4,215 

S.  Y.  Merkle,  Proprietor 84,420 

Purchases    120,600 

Merchandise  Inv 11,500 

Sales   196,450 


$324,630        $324,630 

Inventories : 

Furniture  and  Fixtures $  2,750 

Buildings    12,400 

Real  Estate 48,000 

Advertising    400 

Insurance    125 

Postage   3,Ko 

Interest  (Dr.)    15 

Merchandise 5,8i6 

Salaries  and  Wages  (Cr.)    315 

Prepare  a  working  sheet. 


112  PROBLEMS  AND  EXURCISES 

(Form  E) 

From  the  following  trial  balance  and  inventories  prepare  a 
working  sheet. 

Trial  Balance  Dec.  31. 

Proprietor    $  45,ooo 

Office  Equipment $    3,930 

Delivery  Equipment    2,750 

Land   3,650 

Machinery    25,750 

Buildings   18,650 

Notes  Payable    32,350 

Notes  Receivable  4>757 

Accounts  Payable    4,730 

Accounts  Receivable   32,450 

^ash 3,433 

Advertising    2,570 

Payroll    8,750 

Commission   3,650 

Expense   5,740 

Insurance 3,400 

Postage    865 

Interest , . .  375 

Discounts  and  Allowances  450 

Merchandise  (Jan.  i )   5,650 

Merchandise  Purchases 37,650 

Merchandise  Sales 81,484 

$164,020        $164,020 
Inventory : 

Office  Equipment    $  3,600 

Delivery  Equipment   2,500 

Land    3,400 

Machiner}^-    22,500 

Buildings 18,150 


PREPARATION  OF  STATEMENTS  113 

Advertising 400 

Insurance    5^5 

Postage    125 

Merchandise  7o50 

32. 

(Form  E) 
Prepare  a  working  sheet  from  the  trial  balance  which  you 
prepared  for  Exercise  3  in  Chapter  VIII,  using  the  following  in- 
ventories : 

Merchandise   $  8,210 

Advertising  prepaid 5° 

Insurance:  (The  student  can  deter- 
mine this  inventory.     See  trans- 
action Feb.  8). 
Buildings  (not  including  garage)  .  .$19,900 

Furniture  and  Fixtures 3'000 

Fuel  75 

Delivery  Supplies 20 

Deliver)^  Equipment  75° 

33- 

(Form  E) 
Watson  &  Son,  Trial  Balance,  April  30,  192 1. 

Store  and  Office  Equipment $      340-85 

Delivery  Equipment 550-0O 

Cash  4,303-56 

Accounts  Receivable  9^1-15 

Notes  Receivable  622.00 

Merchandise  Inventory 6,650.00 

Unexpired  Insurance 3^-67 

Notes  Payable    $  6,000.00 

Accounts  Payable 839.00 

John  Watson,  Capital 5,046-55 


114  PROBLEMS  AND  EXERCISES 

John  Watson,  Personal 64.00 

Sales   3438413 

Sales,  Returns  and  Allowances 3.25 

Out-Freight  2.50 

Merchandise  Purchases 1,520.00 

Purchase  Returns  and  Allowances  ....  120.00 

In-Freight   i5-7o 

Salaries    228.00 

Advertising   22.05 

Delivery  Expense 67.50 

Rent   60.00 

Heat  and  Light 32.00 

Office  and  Store  Supplies 78.50 

General  Expense   37-65 

Interest  on  Notes  Payable 43-17 

Cash  Discount  on  Purchases 26.60 

?i5.534-55  $i5.534-5.S 
Inventories:  merchandise,  $5,468.45  ;  coal,  $2.50;  feed,  $1.20; 
postage  and  stationery,  $9.00;  advertising  circulars,  $6.00;  store 
and  office  supplies,  $43.50;  light  expense  accrued,  $8.40;  salaries 
accrued,  $26.67;  delivery  expense,  $8.00;  advertising  expense 
accrued,  $3.20;  insurance  expired  during  month,  $3.34;  interest 
receivable,  $10.25;  and  interest  payable  $11.64. 

Compute  depreciation  on  equipment  for  one  month  only  at 
10%  per  annum. 

Prepare  a  working  sheet. 

34- 

(Form  E) 
Smith  and  Wesson,  Trial  Balance,  May  31,  1921. 

Smith's  Capital $  42.500 

Wesson's  Capital   36,300 

Plant  and  Machinery   $  37,500 

Allow.,  Depr.  of  PI.  and  Mach 1,800 

Stock  on  Hand  (May  31,  1920)   20,525 


PREPARATION  OF  STATEMENTS  115 

Sales  131405 

Purchases — Materials  and  Supplies 51.200 

Warehouse  Labor   7,000 

Truck  Drivers  and  Garage  Labor 9^0QO 

Wages,  Engineers  and  Firemen 3.000 

Salaries  of  Salesmen   11,500 

Office  Salaries    8,000 

Traveling  Expenses,  Salesmen 2,400 

Interest  on  Notes  Payable 600 

Stationery  and  Printing  I75 

Freight  In 2,500 

Freight  Out    2,250 

Commissions   0,375 

Advertising   50o 

Notes  Receivable  6.^ I5 

Interest  on  Notes  Receivable i.^oo 

Rent   4.000 

Taxes  200 

Sales  Discounts  and  Allowances 2,250 

Purchases  Discounts  and  Allowances 3.^00 

Fuel 4,600 

Insurance  ^75 

Accounts  Receivable   30,1 15 

Accounts  Payable   6,150 

Miscellaneous    6,375 


$222,355         $222,355 

Write  off  depreciation  on  plant  and  machinery  at  the  rate_of 
5%  per  annum.  -MtflCUilildlSe  has  become  shopworn  and  (lepre- 
ciated^-tu  at»  uo^in'nH'fO"iin(W!TU"ipi»<|j900.  Accounts  receivable  to 
the  amount  of  $325  are  considered  to  be  uncollectible.  Salaries 
and  wages  have  accrued  as  follows :  warehouse  labor,  $75 ;  wages 
of  drivers,  $100;  engineers  and  firemen,  $65  ;  salesmen,  $65  ;  office 
salaries,  $57.  Interest  is  accrued  as  follows :  on  notes  receivable, 
$205  ;  on  accounts  payable,  $22.    Other  inventories  are  as  follows  : 


Ii6  PROBLEMS  AND  EXERCISES 

Stock  on  hand  May  31,  1916  (at  cost)  ,  .$19,605 

Unexpired  insurance 75 

Advertising  prepaid   125 

Prepare  a  working  sheet. 

Has  the  firm  recently  reduced  its  liabilities? 

35. 

(Form  E) 

Trial  Balance  of  Whaley  &  Parsons,  Dec.  31,  1920. 

Land   $     3000 

Store  Building  &  Warehouse 12,000 

Reserve  for  Depreciation $     3,000 

Garage   2,000 

Store  Equipment   1,200 

Delivery  Equipment    2,500 

Office  Equipment 400 

Cash   560 

Notes  Receivable  i  ,300 

Accounts  Receivable   8,070 

•  Merchandise  Inventory 12,000 

Mortgages  Payable   6,500 

Notes  Payable   5.500 

Accounts  Payable    7.50o 

R.  S.  Whaley,  Capital 8,860 

P.  D.  Parsons,  Capital  5, 100 

Gross  Sales 1 10,000 

Returns  and  Allowances 650 

Merchandise  Purchases 89,000 

Freight,  Exp.  &  Cartage 860 

Cash  Disc,  on  Purchases 950 

Salaries  of  Buying  Force 525 

Other  Buying  Expenses  23 

Salaries  of  Sales  Force 6,540 

Advertising   no 

/    Misc.  Selling  Expense 415 


PREPARA  TI  ON  OF  ST  A  TEMENTS  1 1 7 

Wages  of  Delivery  Force i'530 

Other  Delivery  Exp i'495 

Management  &  Office  Salaries 1.610 

Office  Supplies  &  Expense 122 

Heat,  Light  &  Power 220 

Insurance   ^^ 

Taxes   

Repairs  &  Renewals ^°5 

Telephone  Expense   ^^ 

Ice  &  Cold  Storage  Expense 1^5 

Other  :Misc.  Expense   75 

Reser\'e  for  Uncollected  Accts 9° 

Revenue  Stamps 550 

Interest  Paid ^^ 

$147,500        $147,500 

Supplementary  data : 

Merchandise  inventor)',  including  freight  and  revenue  stamps 

applicable  thereto,  $13,800. 
Compute  depreciation  for  one  year  on  store  building  &  ware- 
house at  3%,  garage  at  4%,  store  and  office  equipment 
at  10%,  and  dehvery  equipment  at  20%,  per  annum. 
Interest  accrued  on  notes  receivable,  $8.50. 
Interest  accrued  on  notes  payable,  $21.50. 
Interest  accrued  on  mortgages  payable,  6^c  for  4  months. 
Expense  accrued  as  follows: 

Salaries  of  sales  force $37-00 

Salary  of  garage  man 18.00 

Advertising  unpaid ^5-50 

Miscellaneous  expense  4-00 

Heat,  light  and  power,  debit  inventory   $25.00 

Unexpired  insurance  35-00. 

Revenue  stamps   \ 

An  examination  of  the  customers'  ledger  shows  that  the  ac- 
counts with  seven  customers,  a  total  of  $545,  are  uncollectible. 
Prepare  a  working  sheet. 


Ii8  PROBLEMS  AND  EXERCISES 

Miscellaneous 

36. 

(Form  B) 

On  Jan.  i,  1920,  the  balance  sheet  of  the  Swift  Trading  Co., 
a  partnership,  stood  as  follows : 

Assets : 

Store  and  Office  Equipment — Cost $  5oOO 

Less  Allowance  for  Depreciation 800 

$     4,700 

Merchandise  Inventory 52,000 

Customer's  Ledger 45,ooo 

Cash    12,000 

Supplies   500 

Insurance  Prepaid 500 

Securities 2,000 

$116,700 
Equities : 

A.  B.  Swift,  Capital $  40,000 

A.  B.  Swift,  Current 1,500 

C.  D.  Swift,  Capital $40,000 

C.  D.  Swift,  Current 2,000 

$  38,000 

Notes  Payable 5,000 

Creditors'  Ledger 31,300 

Wages  Payable 400 

Interest  Payable coo 

$116,700 

A  summary  of  the  business  for  1920  is  as  follows :  Alerchan- 

dise  purchased,  $500,000;  wages  paid,  $30,000;  sales,  $625,000; 

insurance   premiums  paid,   $1,000;   miscellaneous   supplies   pur- 


PREPARA  TION  OF  ST  A  TEMENTS  1 1 9 

chased,  $2,000;  payments  for  advertising,  $1,000;  collections  from 
customers,  $620,000;  customers'  accounts  written  off  as  worthless, 
$1,500;  cash  drawings  by  A.  B.  Swift,  $8,000;  drawing  by  C.  D. 
Swift:  cash,  $7,000,  merchandise  (at  cost),  $500;  dividends  and 
interest  received,  $150;  interest  paid,  $600;  notes  paid,  $3,000; 
new  equipment  purchased,  $500;  second-hand  equipment  which 
cost  $300  was  sold  for  $50;  miscellaneous  expenses  paid,  $1,200; 
payments  to  creditors,  $490,000. 

(a)  Assuming  that  all  purchases  of  merchandise  and  supplies 
were  on  account,  that  there  were  no  cash  sales,  and  that  proper 
allowance  had  been  made  for  the  depreciation  of  the  amount  of 
equipment  sold,  present  the  trial  balance  of  the  firm  as  it  would 
stand  at  the  close  of  business,  Dec.  31,  1920. 

(b)  Making  use  of  the  following  supplementary  data  present 
an  income  statement  covering  the  year's  business  and  a  new  bal- 
ance sheet : 

(i)  Depreciation  rate  is  10%  of  cost  per  year.  The  unit 
sold  was  disposed  of  on  June  30  and  the  new  unit  was  acquired 
the  same  date.  (2)  Merchandise  on  hand,  Dec.  31,  1920,  $40,000 ; 
supplies  on  hand,  $700;  insurance  unexpired,  $400.  (3)  On 
Jan.  I,  1921,  the  firm  will  receive  a  half-year's  interest  on  a  bond 
which  it  holds  amounting  to  $30.  (4)  Interest  accrued  amounts 
to  $100;  wages  unpaid,  $200;  liability  for  accrued  miscellaneous 
expenses,  $50. 

37. 

(Form  F) 

Dr.  Cr.     Assets  Equities     Exp.       Rev, 

Real  Estate  .  .  .  .$20,000 

Buildings    18,000  $    500 

Equipment    $9,000                    1,000 

Supplies   100                    1,200 

Gen.  Items   400 

Accts.  Rec 6,000 

Res.,  Bad  Accts. .  $     300       200 


ll^ 


I20  PROBLEMS  AND  EXERCISES 

Accts.  Pay 20,000 

Rent    200  $        50 

Wages  6,000  6,500 

Purch.  Disc $      200 

Merchandise 12,000  19,000 

Proprietor 

Fill  out  the  above  incomplete  statement,  using  no  figures  not 
given  or  implied.    Prove  your  work  by  striking  balances. 


X 

THE  DETERMINATION  OF  NET  REVENUE 
The  Significance  of  Net  Revenue 

I. 

"Operating  net  revenue  is  the  accountant's  most  important 
figure.  All  of  his  analyses  and  judgments  come  to  focus  in  the 
statement  of  net  revenue.  The  periodic  expression  of  net  revenue 
is  also  the  thing  above  all  in  which  manager,  investor,  current 
creditor,  employee,  the  state,  and  all  other  interests  involved,  are 
vitally  concerned." 

Explain  and  discuss. 

2. 

"The  three  fundamental  tests  which  may  be  applied  to  any 
accounting  principle  or  procedure,  stated  in  the  order  of  their  im- 
portance, are  as  follows : 

(i)  Does  the  procedure  disturb  the  integrity  of  periodic  net 
revenue  ? 

(2)  Does  it  disturb  the  integrity  of  the  balance  sheet,  the 
statement  of  assets  and  equities? 

(3)  Does  it  disturb  the  integrity  of  an  interior  classification 
such  as  expense  or  revenue  ? 

While  these  tests  are  more  or  less  interdependent,  cases  can 
be  given  to  which  each,  alone,  applies.'' 

Discuss,  and  demonstrate,  with  concrete  illustrations,  the 
validity  of  the  last  sentence. 

3- 

Show  that  the  integrity  of  the  net  revenue  balance  is  a  mat- 
ter of  especial  moment  in  cases  where  there  are  several  propri- 
etors or  several  classes  of  investors. 


122  PROBLEMS  AND  EXERCISES 

4. 

State  the  essential  steps  in  the  accounting  process  which  give 
rise  to  the  net  revenue  figure.  Define  net  revenue  precisely  in 
terms  of  the  equities.    In  terms  of  the  assets. 

5. 

Explain  the  distinction  between  the  economist's  "cost  of  pro- 
duction" and  "expense"  as  this  term  is  used  in  accounting. 

6. 

Show  that  the  concept  of  net  revenue  in  its  economic  signifi- 
cance varies  widely  with  different  types  of  organization  and  with 
the  special  circumstances  surrounding  individual  enterprises. 

7- 

H.  A.  Jones  owns  and  operates  a  small  store.  He  hires 
practically  no  help  except  a  delivery  boy.  His  Expense  and 
Revenue  account  for  the  year  191 5  shows  a  credit  balance  of 
$2,500.  Interest  charges  and  other  deductions  amount  to  $150. 
During  1916  Jones  is  forced  to  absent  himself  from  the  business 
entirely  because  of  illness.  He  hires  a  man  to  run  the  store,  paying 
him  a  salary  of  $1,200.  The  balance  of  the  Expense  and  Revenue 
account  at  the  close  of  the  year  is  $1,600.  Interest  charges  and 
other  deductions  amount  to  $125. 

Was  the  business  less  profitable  in  1916  than  in  the  pre- 
ceding year  ?  Explain  fully, 

8. 

H.  P.  Hough  conducts  a  retail  store  business.  He  owns  his 
own  site,  store,  and  fixtures.  He  requires  the  services  of  but  one 
regular  clerk,  and  an  occasional  helper.  He  keeps  the  books  him- 
self, does  all  the  buying,  and  handles  a  large  part  of  the  sales.  At 
the  end  of  1920  his  income  statement  shows  net  earnings  of 
$4,500. 


DETERMINATION  OF  NET  REVENUE  123 

Assuming  that  he  has  approximately  $15,000  invested  in  the 
business,  make  what  seems  to  you  to  be  a  reasonable  division  of 
this  net  income  into  its  fundamental  economic  elements. 

Suppose  ]\Ir.  Hough  regularly  draws  $200  a  month  from  the 
business,  how  should  this  be  recorded?    Explain  fully. 

Suppose  Mr.  Hough  draws  irregularly  but  wishes  to  charge 
his  salary  account  with  $200  each  month,  how  should  the  situation 
be  recorded  if  the  accounts  are  to  give  the  utmost  information  to 
the  proprietor?     Show  fully,  with  skeleton  accounts  and  entries. 

9. 

An  accountant  tells  Mr.  Hough  (continuing  Problem  8)  that 
he  should  charge  revenue  each  year  with  a  reasonable  allowance 
for  his  own  services,  the  use  of  his  land  and  building,  and  the  use 
of  his  capital.  He  insists  that  accounts  should  be  opened  and 
that  journal  entries  should  be  made  at  the  end  of  the  period,  or  in 
a  regular  sequence  during  the  year,  to  record  these  "costs."  For 
the  following  year,  assuming  capital  conditions  to  remain  the  same 
and  that  ]\Ir.  Hough  will  require  $200  per  month  for  living  costs, 
he  suggests  that  the  following  entries  be  made  once  each  month : 

(i)   Proprietor's   Salary  Expense $250 

Cash    200 

Profit  and  Loss 50 

(To  charge  revenue  with  a  reasonable 
allowance  for  proprietor's  services) 

(2)  Interest  on  Capital  Owned 75 

Profit  and  Loss 75 

(To  charge  revenue  with  6%  of  $15,- 
000  for  one  month) 

(3)  Rent  of  Site  and  Building  Owned.  .  .    150 

Profit  and  Loss 150 

(To  charge  revenue  with  a  fair  allow- 
ance for  rent  of  properties  owned) 

Criticize  this  suggestion  fully.     Show  that  entries    (2)   and 


124  PROBLEMS  AND  EXERCISES 

(3)  involve  a  sheer  duplication,  and  that  certain  actual  expenses 
arising  under  other  heads  largely  take  the  place  of  the  hypothe- 
tical charge  under  (3).  Show  further  that  the  net  balance  of 
the  Profit  and  Loss  account  is  not  affected  by  this  procedure. 

10. 

There  are  various  questions  to  which  the  proprietor  wants 
an  answer: 

(i)  How  much  have  I  actually  made  during  the  past  per- 
iod? 

(2)  How  much  might  I  have  made  had  I  embarked  upon 
some  alternative  course  ? 

(3)  How  much  more  or  less,  as  the  case  may  be,  have  I 
made  than  I  would  have  made  had  I  embarked  on  the  alterna- 
tive course  ? 

Which  of  these  questions  are  the  accounts  designed  to 
answer?  Show  that  any  attempt  to  answer  the  others  by  formal 
accounting  entries  is  utterly  futile. 

XI. 

A  crop  of  wheat,  nearly  ready  to  harvest,  was  destroyed  by  a 
hail  storm.  The  farmer  deducted  the  estimated  value  of  the  crop 
as  a  loss  in  his  income  tax  return.  The  auditor  for  the  Internal 
Revenue  Bureau  threw  out  this  deduction. 

Show  that  the  auditor's  procedure  conformed  to  sound  ac- 
counting principles.  To  what  deductions  was  the  farmer  entitled 
on  account  of  this  crop?  Draw  a  general  conclusion  with  re- 
spect to  the  meaning  of  the  term  "loss"  for  the  accountant. 

12. 

A  retail  fuel  dealer,  in  determining  his  year's  costs  for  the 
Fuel  Administration,  included  an  item  entitled  "flood  loss,  $600." 
Inquiry  disclosed  the  fact  that  this  was  the  dealer's  estimate  of  the 
value  of  supplies  destroyed,  the  additional  repairs  made  necessary, 


DETERMINATION  OF  NET  REVENUE  135 

the  increase  in  payroll  due  to  floods,  the  amount  of  merchandise 
damage,  and  the  estimated  value  of  the  extra  time  he  was  obliged 
to  devote  to  the  business  on  this  account. 

Discuss  fully,  showing  what  accounting  methods  the  dealer 
must  follow  to  avoid  duplication  and  padding  of  expense  by  the 
inclusion  of  this  special  item. 

The  Cash  Statement 

13- 

In  the  early  days  of  a  certain  railway  company,  it  is  said, 
the  president  of  the  road  simply  inquired  as  to  the  status  of  the 
bank  balance  in  deciding  whether  or  not  to  pay  a  dividend. 

Discuss  the  propriety  of  such  a  procedure.  Show  specifically 
that  cash  might  be  increased  in  a  particular  case  even  though  the 
business  were  being  operated  at  a  loss.  Show  that  the  converse 
might  also  be  true.  State  definitely  the  several  conditions  which 
must  be  present  before  it  is  feasible  to  draw  cash  from  the  busi- 
ness as  profits. 

14. 

The  year's  expense  and  revenue  statement  for  a  corporation 
shows  a  net  revenue  of  $75,000.  This  compares  favorably  with 
the  showing  of  previous  years.  Interest  requirements  total  $25,- 
000.  The  capital  stock  amounts  to  $500,000;  and  a  7%  dividend 
has  been  customar}^  Owing  to  unusually  heavy  outlays  for  sup- 
plies and  to  late  collections  the  cash  balance  is  very  low,  amounting 
to  only  $20,000. 

How  is  the  company  to  meet  its  interest  charges?  Should 
the  dividend  be  foregone  until  a  more  favorable  showing  of 
cash  is  attained?  Answer  the  last  question  assuming:  (a) 
that  the  stock  of  the  corporation  is  closely  held  by  a  few  wealthy 
men;  and  (b)  that  the  stock  is  largely  held  in  small  lots,  the 
owners  of  which  depend  in  many  cases  upon  the  usual  dividend 
to  meet  current  obligations. 


126 


PROBLEMS  AND  EXERCISES 


15. 

The  balance  sheet  of  Moore  and  Van  Fleet  on  Dec.  31,  1920, 
stood  as  follows : 


Assets : 

Store  Fixtures $  2,000 

Office  Equipment 1,000 

Merchandise   25,000 

Accounts  Receivable  ..  .  15.000 

Accrued  Items 200 

Cash 4,800 


Equities : 
A.  D.  Moore,  Capital.  .$15,000 

S.  Van  Fleet,  Capital..  15,000 

S.  Van  Fleet,  Drawing.  800 

Notes  Payable 5,000 

Accounts   Payable 10,700 

Accrued  Items 1,500 


$48,000 


$48,000 


On  Dec.  31,  1921,  the  balance  sheet  is  as  follows: 


Assets : 

Store  Fixtures $  1,800 

Office  Equipment 1,200 

Merchandise   26,000 

Accounts  Receivable.  .  .  19,000 

Accrued  Items 500 

Cash 2,500 


Equities : 
A.  D.  ]\Ioore,  Capital.  .$15,500 

A.  D.  Moore,  Drawing.  1,250 

S.  Van  Fleet,  Capital..  15.500 

Notes  Payable 5,650 

Accounts  Payable 12,600 

Accrued  Items 500 


$5 1 ,000  $5 1 ,000 

(a)  Assuming  that  the  partners  have  withdrawn  no  funds 
and  made  no  new  investments  during  the  year,  what  was  the  net 
revenue  of  the  business  for  the  year  1921  ?  Assuming  that  Van 
Fleet  drew  $1,500  and  ]\Ioore  $250  during  the  year  what  was  the 
net  revenue? 

(b)  Assuming  all  conditions  to  be  unchanged  except  that  in 
the  second  balance  sheet  Accounts  Receivable  stands  at  but  $17,000 
and  Notes  Payable  is  correspondingly  reduced,  answer  the  same 
question. 

(c)  Assuming  all  conditions  to  be  unchanged  except  that  the 
Cash  item  in  the  second  balance  sheet  stands  at  $2,000  and  Ac- 


DETERMINATION  OF  NET  REVENUE  127 

counts   Receivable    is    correspondingly    increased,   give   the   net 
revenue  figure. 

(d)  Assuming  conditions  unchanged  except  for  a  reduction 
of  $500  cash  in  Cash  and  A.  D.  Moore,  Drawing,  answer  the 
question. 

(e)  Draw  a  general  conclusion. 

16. 

State  three  main  kinds  of  transactions  affecting  the  credit 
side  of  the  cash  account  which  have  no  direct  effect  upon  ex- 
pense. State  four  types  of  transactions  affecting  the  debit  side 
of  the  cash  account  but  having  no  immediate  effect  upon  the 
revenue  account.  Similarly  give  two  kinds  of  transactions  which 
affect  revenue  but  do  not  directly  disturb  cash  and  three  kinds  of 
transactions  which  affect  expense  but  do  not  immediately  affect 
the  cash  account. 

17. 
(Form  B) 

The  treasurer  of  an  electric  light  and  power  company  pre- 
sents the  following  statement  of  receipts  and  disbursements : 

Receipts 
Cash  on  hand  Jan.  i,  1915. .  .  $11,600 

Residence  Lighting   $24,500 

Street   Lighting    13,200 

New   Mortgage    30,000 

Notes  Payable    15,000 

Shop  Lighting   8,700 

Power  Sales   39,200 

Water  Rights  Rentals 2,100 

Miscellaneous    1,500 

Total  Receipts  for  the 

Year  $134,200 

$145,800 


ia8  PROBLEMS  AND  EXBRCISBS 

Disbursements 

Materials  and  Supplies    . , .  .$  7,200 

Line   Extensions    12,600 

New  Dynamos  and  Equipment  18,200 

Wages  and  Salaries   20,500 

Interest  on   Mortgages   and 

Notes    5,700 

Notes  Payable    5,ooo 

Dividends   18,000 

Repairs  and  Maintenance. .  .    12,500 

Taxes    1,500 

Improvements  to  Power  Sta- 
tion      16,700 

Office  and  General  Expense . .    12,300 

Miscellaneous  Expense 1,600 

Total  Disbursements  for 

the  Year $131,800 

Cash  on  hand  Dec.  31,  1915 $  14,000 

Prepare  statements  of  expense  and  revenue  and  net  revenue 
from  the  above  report.  In  just  what  respects  do  the  statements 
you  have  prepared  fail  to  represent  the  actual  situation? 

Deferred  Charges  and  Credits 

18. 

At  the  end  of  the  fiscal  period,  what  general  considerations 
should  determine  whether  an  outlay  should  be  carried  to  the 
balance  sheet  or  to  the  expense  and  revenue  statement? 

19. 

A  certain  corporation  has  uninsured  property  destroyed  by 
fire  amounting  to  $15,000.  There  are  at  least  three  possible  ways 
of  treating  this  item  in  the  accounts  and  statements,  each  of  which 


DETERMINATION  OF  NET  REVENUE 


129 


can  be  defended  under  certain  circumstances.  State  the  three 
alternatives  and  explain  the  circumstances  which  would  justify 
each  procedure. 

If  the  above  loss  occurred  during  the  construction  period  a 
fourth  procedure  might  conceivably  be  allowed.    Explain, 

20. 

A  corporation  has  loaned  $50,000  to  one  of  the  directors 
who  is  also  treasurer  of  the  company.  Upon  the  death  of  this 
officer  it  is  discovered  that  his  estate  is  bankrupt,  and  that  there 
are  shortages  in  certain  sinking  funds  amounting  to  $25,000. 
Assuming  that  the  treasurer's  estate  amounts  to  but  10%  of  all 
claims,  state  how  you  would  recommend  that  this  matter  be 
dealt  with  on  the  books  of  the  corporation.  (Give  journal  en- 
tries). 

21. 

"It  is  unjust  to  the  stockholders  to  burden  the  revenue  of 
succeeding  years  with  charges  covering  outlays  the  benefit  from 
which  is  entirely  exhausted  in  the  current  or  preceding  ac- 
counting periods."    Discuss. 

22. 

"The  cost  of  stripping  overburden  in  the  case  of  mining 
properties  requires  unusually  heavy  expenditures  for  one  or 
two  years  and  hence  should  not  be  entirely  charged  to  expense  in 
the  periods  in  which  the  outlay  actually  occurs  but  should  be 
distributed  evenly  over  several  succeeding  periods ;  similarly 
unusual  losses  caused  by  technical  improvements,  accidents,  etc., 
should  be  distributed  over  several  expense  and  revenue  state- 
ments." 

Why  should  expenditures  for  stripping,  insurance  prem- 
iums, long-term  leases,  etc.,  be  distributed  over  the  statements 
of  several  fiscal  periods?  Is  there  any  relation  between  such 
expenditures  and  losses  caused  by  accidents  and  invention? 


I30  PROBLEMS  AND  EXERCISES 

23. 
Can  losses  occur  even  if  no  revenue  whatever  is  being  pro- 
duced? Illustrate.  Why  should  a  loss  not  be  treated  as  a  de- 
ferred charge  to  operation  ?  Can  you  see  any  reason  for  the  rule 
of  the  Interstate  Commerce  Commission  which  permits  a  road, 
under  certain  conditions,  to  carry  the  undepreciated  cost  of  aban- 
doned property  in  the  balance  sheet  as  a  deferred  charge,  a  charge 
which  is  subsequently  written  into  operating  expense? 

24. 

A  partially  completed  factory  building  is  destroyed  by  a 
cyclone.  There  is  no  insurance.  How  should  this  case  be  dealt 
with  in  accounts? 

25- 

"While  a  large  proportion  of  American  business  is  done  on 
a  credit  basis,  i.  e.,  where  services  are  sold  and  delivered  signifi- 
cantly in  advance  of  payment,  there  are  numerous  important  cases 
where  just  the  reverse  is  the  customary  procedure,  i.e.,  where 
payment  is  made  in  advance  of  delivery.  Transportation  com- 
panies, amusement  houses,  insurance  companies,  milk  retailers, 
and  others  commonly  receive  payment  from  customers  before 
furnishing  the  commodity  or  service  involved.  This  kind  of  situa- 
tion gives  rise — on  the  books  of  the  vendor — to  a  special  type  of 
liability,  a  liability  which  is  liquidated  with  goods  or  services 
rather  than  cash,  and  the  amount  of  which  is  later  transferred  to 
revenue.  On  the  books  of  the  vendee,  a  special  type  of  account 
receivable  is  created,  a  receivable  which  is  later  exchanged  for 
appropriate  goods  or  services  and  the  amount  of  which  ultimately 
constitutes  cost." 

Discuss,  giving  concrete  illustrations  and  journal  entries  cov- 
ering your  cases  on  the  books  of  both  vendor  and  vendee. 

26. 

A  newly  organized  fire  insurance  company  inaugurates  a  big 
selling  campaign  and  writes  insurance  during  the  first  year  of 


DETERMINATION  OF  NET  REVENUE  131 

business  which  yields  premiums  amounting  to  $800,000.  At  the 
end  of  the  year  it  is  found  that  of  this  amount  $450,000  represents 
premiums  apphcable  to  unexpired  insurance. 

Give  entries  covering  this  situation  on  the  books  of  the 
company  and  explain  carefully  the  nature  of  the  various  accounts 
involved. 

27. 

(a)  During  the  month  of  May  an  amusement  company 
sells  season  tickets  amounting  to  $4,500.  In  the  same  month 
these  tickets  are  cancelled  to  the  amount  of  but  $1,500.  In 
preparing  an  expense  and  revenue  statement  for  May,  how 
should  this  situation  be  handled? 

(b)  Suppose  that  the  expenses  of  the  above  company 
are  nearly  constant  month  by  month,  while  revenue  is  large 
in  the  summer  months  and  dwindles  decidedly  in  the  winter  sea- 
son.    In  this  case  is  the  month  a  significant  accounting  period? 

Wasting  Assets 

28. 

What  are  the  pecularities  of  natural  resources  such  as  mines, 
gas  and  oil  wells,  timber  tracts,  etc.,  which  justify  the  applica- 
tion thereto  of  the  special  designation,  "wasting  assets"?  Are 
orange  groves,  rubber  plantations,  apple  orchards,  and  the  like, 
also  in  this  group  ? 

29. 

A  mining  company  acquires  a  mineral  tract  at  a  cost  of 
$100,000.  Equipment  is  purchased  at  a  cost — including  installa- 
tion— of  $50,000.  During  the  first  year  of  operation  sales  total 
$120,000;  labor  costs  amount  to  $60,000;  supplies  and  other  cur- 
rent costs  applicable  to  the  year's  business  total  $30,000;  depre- 
ciation of  equipment  is  estimated  at  $5,000. 

(a)  A\'hat  other  fact  must  the  accoimtant  know  before  he  can 
determine  the  company's  net  revenue  for  the  year? 


132  PROBLEMS  AND  EXERCISES 

(b)  Assuming  that  it  has  been  ascertained  by  exploration 
that  the  ore  body  will  last  just  lo  years  at  the  current  rate  of  ex- 
haustion, compute  the  company's  net  revenue  for  the  year. 

(c)  The  company  declares  and  pays  a  cash  dividend  of 
$20,000  to  its  stockholders.  Give  appropriate  journal  entries  and 
explain. 

(d)  A  is  the  holder  of  10%  (1000  shares)  of  the  company's 
stock.  He  bought  his  stock  at  an  average  price  of  $10  per  share, 
expecting  it  to  yield,  net,  about  15%  per  annum.  Give  the  ap- 
propriate journal  entries  on  his  books  covering  the  receipt  of  his 
dividend  check,  and  explain. 

Maintenance  and  Improvement 

30- 

The  management  of  a  railroad  company  decides  to  eliminate 
a  double  curve  from  its  line,  in  order  to  better  train  time,  reduce 
fuel  and  other  expenses  and  insure  the  safety  of  passengers.  It 
is  necessary  to  cut  a  roadbed  through  high  ground  and  lay  two 
miles  of  new  track.  The  total  cost  of  the  new  line  is  $195,000. 
The  book  value  of  the  old  right-of-way  and  track  is  $75,000. 
This  figure  represents  cost ;  the  amount  credited  to  depreciation 
reserves  applicable  to  this  part  of  the  property  is  $15,000.  The 
company  realizes  $1,500  through  the  sale  of  the  right-of-way  of 
the  abandoned  line,  and  recovers  rails,  ties  and  other  property 
with  an  estimated  value  of  $12,500. 

The  corporation  bookkeeper  makes  entries  which,  in  essence, 
amount  to  the  following : 

New  Property  $195,000 

Cash  (and  equivalents)   $195,000, 

and. 

Cash    $     1,500 

Salvage    12,500 

Old  Property $  14,000. 

Discuss  the  propriety  of  this  accounting  procedure. 


DETERMINATION  OF  NET  REVENUE 


31- 


133 


A  railroad  company  replaces  a  wooden  bridge  which  cost 
$15,000  (and  is  carried  in  the  accounts  at  that  figure)  with  a 
concrete  structure  involving  an  expenditure  of  $12,500.  The  new 
bridge  is  much  more  substantial  than  the  old,  being  capable  of 
carrying  a  25%  greater  load;  and  it  is  also  more  durable.  Give 
entries  showing  how  this  situation  should  be  handled  in  the  ac- 
counts. 

Suppose  the  new  bridge  cost  $17,500  and  had  exactly  the 
same  physical  efficiency  as  the  old,  what  entries  should  be 
made?  Assuming  the  new  bridge  is  less  substantial  and  durable 
than  the  old  and  costs  $20,000,  what  are  the  entries? 

Draw  a  general  conclusion. 

32. 

The  following  represents,  in  summary  form,  a  corporation's 
balance  sheet: 

Plant  and  Equipment. $175,000      Capital  Stock $200,000 

Current  Assets 115,000      Income  Bonds,  6%.  . .     50,000 

Profit  and  Loss 15,000      Other  Liabilities   ....     35,000 

\^aluation  Reserves . .  .      20,000 


$305,000  $305,000 

What  is  the  amount  of  the  stockholders'  equity  as  shown  by 
this  statement? 

The  management,  acting  in  the  interest  of  the  common  stock- 
holders, has  adopted  an  ultra-conservative  policy  in  accounting. 
In  the  four  years  the  company  has  been  operating  a  deficit  of 
$15,000  has  been  accumulated,  and  no  dividends  have  been  paid 
to  the  stockholders  nor  interest  to  the  bondholders.  During  this 
period  patents  originally  carried  at  $25,000  have  been  charged  to 
expense.  Gross  revenues  are  increasing  and  a  reasonable  esti- 
mate as  to  the  present  value  of  the  patent  rights  is  $15,000.  The 
original  book  value  should  have  been  $20,000.  Machinery  which 
cost  $12,000  has  been   replaced  with  new  machinery   requiring 


132  PROBLEMS  AND  EXERCISES 

(b)  Assuming  that  it  has  been  ascertained  by  exploration 
that  the  ore  body  will  last  just  lo  years  at  the  current  rate  of  ex- 
haustion, compute  the  company's  net  revenue  for  the  year. 

(c)  The  company  declares  and  pays  a  cash  dividend  of 
$20,000  to  its  stockholders.  Give  appropriate  journal  entries  and 
explain. 

(d)  A  is  the  holder  of  10%  (1000  shares)  of  the  company's 
stock.  He  bought  his  stock  at  an  average  price  of  $10  per  share, 
expecting  it  to  yield,  net,  about  15%  per  annum.  Give  the  ap- 
propriate journal  entries  on  his  books  covering  the  receipt  of  his 
dividend  check,  and  explain. 

Maintenance  and  Improvement 

30. 

The  management  of  a  railroad  company  decides  to  eliminate 
a  double  curve  from  its  line,  in  order  to  better  train  time,  reduce 
fuel  and  other  expenses  and  insure  the  safety  of  passengers.  It 
is  necessary  to  cut  a  roadbed  through  high  ground  and  lay  two 
miles  of  new  track.  The  total  cost  of  the  new  Hne  is  $195,000. 
The  book  value  of  the  old  right-of-way  and  track  is  $75,000. 
This  figure  represents  cost;  the  amount  credited  to  depreciation 
reserves  applicable  to  this  part  of  the  property  is  $15,000.  The 
company  realizes  $1,500  through  the  sale  of  the  right-of-way  of 
the  abandoned  line,  and  recovers  rails,  ties  and  other  property 
with  an  estimated  value  of  $12,500. 

The  corporation  bookkeeper  makes  entries  which,  in  essence, 
amount  to  the  following : 

New  Property  $195,000 

Cash  (and  equivalents)   $195,000, 

and, 

Cash    $     1,500 

Salvage    12,500 

Old  Property $  14,000. 

Discuss  the  propriety  of  this  accounting  procedure. 


DETERMINATION  OF  NET  REVENUE 


31- 


U3 


A  railroad  company  replaces  a  wooden  bridge  which  cost 
$15,000  (and  is  carried  in  the  accounts  at  that  figure)  with  a 
concrete  structure  involving  an  expenditure  of  $12,500.  The  new 
bridge  is  much  more  substantial  than  the  old,  being  capable  of 
carrying  a  25%  greater  load;  and  it  is  also  more  durable.  Give 
entries  showing  hov/  this  situation  should  be  handled  in  the  ac- 
counts. 

Suppose  the  new  bridge  cost  $17,500  and  had  exactly  the 
same  physical  efficiency  as  the  old,  what  entries  should  be 
made?  Assuming  the  new  bridge  is  less  substantial  and  durable 
than  the  old  and  costs  $20,000,  what  are  the  entries? 

Draw  a  general  conclusion. 

32. 

The  following  represents,  in  summary  form,  a  corporation's 
balance  sheet: 

Plant  and  Equipment. $175, 000      Capital  Stock $200,000 

Current  Assets 115,000      Income  Bonds,  6%  . . .     50,000 

Profit  and  Loss 15,000      Other  Liabilities   ....     35,000 

\"aluation  Reserves . .  .      20,000 


$305,000  $305,000 

What  is  the  amount  of  the  stockholders'  equity  as  shown  by 
this  statement? 

The  management,  acting  in  the  interest  of  the  common  stock- 
holders, has  adopted  an  ultra-conservative  policy  in  accounting. 
In  the  four  years  the  company  has  been  operating  a  deficit  of 
$15,000  has  been  accumulated,  and  no  dividends  have  been  paid 
to  the  stockholders  nor  interest  to  the  bondholders.  During  this 
period  patents  originally  carried  at  $25,000  have  been  charged  to 
expense.  Gross  revenues  are  increasing  and  a  reasonable  esti- 
mate as  to  the  present  value  of  the  patent  rights  is  $15,000.  The 
original  book  value  should  have  been  $20,000.  Machinery  which 
cost  $12,000  has  been  replaced  with  new  machinery   requiring 


134  PROBLEMS  AND  EXERCISES 

an  outlay  of  $18,000.  No  allowance  was  made  on  the  books  for 
this  improvement.  Depreciation  charges  on  equipment  have  been 
excessive  by  $8,000.  Reserve  for  Bad  Debts  stands  at  $5,000. 
This  is  $2,000  in  excess  of  a  liberal  estimate  of  the  worthless 
accounts.  Depreciation  of  buildings  has  been  overstated,  $2,500. 
If  the  accounting  procedure  had  been  strictly  accurate  how 
would  the  above  balance  sheet  be  modified  and  what  would  be 
the  amount  of  proprietorship  to-date  (assuming  four  years  of 
operation)  ?    Discuss  fully. 

33. 

While  repairing  the  snow  fences  along  an  electric  railway  the 
repair  gangs,  in  addition  to  replacing  any  worn  parts,  drive  extra 
nails  and  use  new  lumber  for  strengthening  particularly  trouble- 
some stretches,  which  cost  $175.  Should  this  amount  be  consider- 
ed an  improvement  and  consequently  be  charged  to  capital  ? 

34- 

Explain  what  is  meant  by  a  "secret  reserve".  List  five  com- 
mon practices  which  lead  to  such  reserves.  Are  any  of  these 
practices  justifiable?  Show  that  the  interests  of  certain  classes 
of  security  holders  may  be  jeopardized  by  such  practices. 

35. 

A  self-starter  is  attached  to  the  firm's  delivery  car  at  a  cost 
of  $85.    How  should  this  item  be  treated  in  the  accounts? 

The  car  is  damaged  in  an  accident.  The  cost  of  repairing 
the  damage  is  $50.  To  what  class  of  accounts  should  this  outlay 
be  charged? 

36. 

A  company  owns  a  timber  tract  which  it  will  take  about  10 
years  to  cut.  To  facilitate  logging  operations  a  road  is  built 
across  the  property  at  a  cost  of  $15,000.  How  should  this  outlay 
be  dealt  with  by  the  acountant  ? 


DETERMINATION  OF  NET  REVENUE  135 

37- 

A.  B.  Snow  is  sued  by  the  X  Co.  for  patent  infringement, 
and  his  legal  expenses  total  $2,500.  How  should  this  outlay  be 
treated  on  Snow's  books. 

Suppose  that  Mr.  Snow  lost  the  suit,  and  in  addition  to  his 
own  legal  expenses  had  to  pay  costs  of  $3,000  and  damages  of 
$5,000.     How  would  you  answer  the  above  question? 

38. 

Jabez  Homer  leases  his  empty  store  building  for  5  years  to 
a  moving  picture  company.  As  a  necessary  condition  of  the  lease 
Homer  is  obliged  to  do  some  remodeling  which  costs  $500.  What 
is  the  accounting  significance  of  this  outlay? 

At  its  expiration  the  lease  is  not  renewed  and  again  Homer 
finds  himself  with  a  vacant  property  on  his  hands.  After  vainly 
trying  for  some  time  to  negotiate  another  lease  with  moving  pic- 
ture operators,  and  failing  to  sell,  he  decides  to  reconvert  the 
structure  into  a  store  building  and  to  go  into  the  grocery  business 
himself.  The  cost  of  remodeling  front  and  installing  display 
cases  and  other  necessary  fixtures  is  $1,500.  State  the  proper 
accounting  treatment  for  this  cost. 

39^ 

In  1917  a  certain  manufacturer  converted  a  tenement  house 
which  he  owned  into  a  factory  for  manufacturing  gas  shells  on 
U.  S.  Government  account.  He  moved  his  tenants  to  new  quar- 
ters at  considerable  expense,  and  spent  several  thousand  dollars 
in  remodeling.  In  1918,  after  the  armistice,  he  used  the  build- 
ing principally  for  storage  purposes.  In  1919  he  spent  about 
$3,000  restoring  the  building  to  its  original  use. 

Discuss  the  treatment  of  these  outlays  in  the  accounts. 


136  PROBLEMS  AND  EXERCISES 

Appreciation  and  Depreciation 

40. 

The  expense  and  revenue  statement  for  a  certain  firm  shows 
a  credit  balance  of  $113,700.  An  appraisal  shows  that  real  estate 
has  appreciated  $25,000  above  book  value.  Give  entries  record- 
ing this  item  of  appreciation,  assuming:  (a)  that  the  increase  in 
value  has  occurred  during  the  current  year;  (b)  that  the  apprecia- 
tion has  occurred  during  five  years.  What  it  total  net  revenue 
for  the  year,  assuming  the  increase  in  real  estate  values  is  a  cur- 
rent change  ?  Could  a  cash  dividend  or  interest  appropriation  be 
made  covering  this  entire  amount? 

41. 

Distinguish  between  total  net  revenue,  and  net  revenue  from 
operation.  Show  by  illustration  that  it  may  be  a  difficult  matter 
to  determine  the  exact  amount  of  net  revenue  which  is  the  signifi- 
cant figure  for  comparative  purposes. 

42. 

During  the  year  19 14,  A  is  general  manager  for  the  B  cor- 
poration. The  slow  business  of  that  year  makes  the  operating 
sheet  an  unsatisfactory  one  although  A  has  directed  the  affairs  of 
the  corporation  very  efficiently.  A  foresees  an  improved  business 
situation  in  191 5  and  has  taken  advantage  of  the  prevailing  low 
prices  to  stock  up  on  raw  materials  and  supplies  in  the  fall  of 

1914.  Total  net  revenue  for  the  year  amounts  to  $1,475,000.    In 

191 5,  B  succeeds  A  as  general  manager.  Business  booms,  prices 
advance  rapidly,  and  net  revenue  for  the  year  totals  $2,700,000. 
If,  however,  all  raw  materials  had  been  purchased  at  prevailing 
19 1 5  prices,  net  revenue  would  have  amounted  to  but  $2,200,000. 

What  may  we  term  this  additional  half-million  of  profit? 
Can  the  net  revenues  of  the  two  years  be  used  for  comparative 
purposes  as  a  test  for  efficiency? 


DETERMINATION  OF  NET  REVENUE  137 

'Miscellaneous 

43. 

A  fruit  vendor  begins  business.  During  the  first  day  he  buys 
merchandise  at  a  cost  of  $100;  he  pays  a  Hcense  fee  of  $5;  he 
buys  suppHes  with  a  cost  of  $2.  All  labor  and  other  services  he 
furnishes  himself.    He  sells  goods  for  cash,  $90. 

What  other  facts  must  you  have  in  order  to  determine  his 
profit  for  the  day? 

44. 

X  and  Y,  realty  brokers,  donate  $500  from  their  business 
funds  for  famine  relief.    Is  this  a  loss?    Explain. 

45- 

A  piano  dealer  buys  goods  amounting  to  $5,000.  He  sells 
these  goods  on  a  5-year  monthly  installment  plan,  the  gross  price 
being  $10,000.  What  procedure  would  you  suggest  that  he  follow 
in  determining  net  income  the  first  year,  assuming  collections  dur- 
ing the  period  total  $2,000? 

46. 

A  contractor  is  building  a  paved  road,  30  miles  in  length, 
for  the  State  of  Michigan.  He  starts  work  in  1918  and  finishes 
the  job  in  1921.  He  is  paid  nothing  until  completion.  Assum- 
ing this  was  his  only  job  during  the  period  did  he  make  any  pro- 
fit prior  to  1921  ?    Explain  fully. 

47- 

A  realty  speculator  buys  a  tract  of  5  acres  of  urban  land  in 
1921  at  a  cost  of  $25,000.  Costs  of  subdividing  and  improving 
total  $10,000.  The  land  is  divided  into  25  parcels,  each  of  ap= 
proximately  the  same  grade  and  price.  He  sells  four  lots  in 
1921  @  $2,000.     Ignoring  selling  costs  what  is  his  profit? 


I40  PROBLEMS  AND  EXERCISES 

(b)  Jackson  withdraws  $ioo  for  personal  use. 

(c)  The  net  revenue  for  a  month,  $200,  is  transferred  to 
Jackson's  account. 

(d)  The  net  revenue  above  mentioned  is  withdrawn  by  the 
proprietor. 

(e)  Jackson  decides  to  enlarge  the  business  and  reinvests 
the  above  withdrawals  ((b)  and  (d))  and  $500  additional 
capital. 

(f)  A  fire  in  the  freight  depot  destroys  merchandise  con- 
signed to  Jackson  valued  at  $1,200.  Jackson  has  already  acknow- 
ledged receipt  of  these  goods.  He  sues  the  railroad  company  and 
finally  is  awarded  $1,000  in  damages;  his  expenses  during  the 
suit  are  $300. 

4- 

A,  the  proprietor  of  a  small  business,  allows  himself  a  salary 
of  $150  per  month.  How  is  this  fact  to  be  recognized  in  the 
accounts  (a)  assuming  A  actually  withdraws  in  cash  the  amount 
of  his  salary,  and  (b)  that  no  withdrawals  are  made?  Explain 
carefully  the  significance  of  such  proprietary  transactions. 

5- 

J.  L.  Crandall  is  the  proprietor  of  a  shoe  store.  You  are 
thinking  of  buying  the  enterprise.  The  following  statement  is 
handed  you,  June  31 : 

Inventory 

Stock   $32,000 

Furniture  and  Fixtures 4,500 

Notes  and  Accounts  Receivable  .  .     6,000 

Miscellaneous  Assets   2,200 

Notes  and  Accounts  Payable 6,700 

Other  Liabilities   300 

Supposing  this  statement  to  represent  the  condition  of  afifairs 
to-date  (and  assuming  the  enterprise  to  be  a  going  concern),  how 
much  are  you  willing  to  pay  Crandell  for  his  business?  What  is 
the  amount  of  proprietorship? 


SINGLE  PROPRIETORS  AND  PARTNERS  141 

6. 

What  are  the  advantages  of  keeping  proprietorship  accounts 
and  subsidiary  accounts  with  expense  and  revenue  items  even  in 
the  case  of  a  small  single-proprietor  enterprise?  If  specific  pro- 
prietorship accounts  are  not  kept  in  such  a  case  how  is  the  amount 
of  proprietorship  to  be  ascertained? 

7- 
The  balance  sheet  of  a  certain  business  on  Jan.   i,    1917, 
appears  as  follows: 

Assets  Liabilities 

Bldg.  and  Equipment.  .$11,400      Proprietor,  Capital   ...$20,000 

Merchandise   17,800     Proprietor,  Personal  . .        220 

Notes  and  Accts.  Rec.      1,400      Notes  and  Accts.  Pay..    13,300 

Supplies 400 

Insurance    180 

Cash  2,340 

$33,520  $33,520 

On  July  I,  the  balance  sheet  of  the  same  firm  appears  as 
follows : 

Assets  Liabilities 

Bldg.  and  Equipment.  .$12,000      Proprietor,  Capital $20,000 

Merchandise    21,500      Proprietor,   Personal...        540 

Notes  and  Accts.  Rec.        900      Notes  and  Accts.  Pay..    16,430 

Supphes  300 

Insurance 120 

Cash  2,150 

$36,970  $36,970 

Assuming  that  there  has  been  no  new  proprietary  investment 
during  the  six  months  and  no  withdrawals,  what  is  the  proprietary 
income  for  the  period?  Is  all  the  information  given  in  this 
problem  necessary  to  the  solution?    Explain. 


142 


PROBLEMS  AND  EXERCISES 
Copartnership  Proprietary  Accounts 


8. 

(a)  State  the  essential  characteristics  of  a  partnership. 

(b)  Show  why  proprietorship  accounts  are  of  greater  im- 
portance where  several  partners  are  involved  than  in  the  sole- 
proprietor  enterprise. 

9- 

(Forms  B  and  C) 

A  and  B  decide  to  begin  business  as  equal  partners.  Each 
invests  $5,000.  During  the  first  year  A  withdraws  $1,750  from 
the  enterprise.  B  withdraws  $500.  Net  proprietary  income  for 
the  year  amounts  to  $2,100.  This  income  is  divided  equally  be- 
tween the  partners.  During  the  second  year  A  withdraws  $1,400; 
B  makes  no  withdrawals.  Net  income  for  the  year  amounts  to 
$1,950.  This  income  is  divided  in  proportion  to  the  partners' 
investments  as  they  appear  just  before  the  division. 

Journalize  all  these  transactions  in  so  far  as  they  affect  the 
partners'  accounts,  and  prepare  an  exhibit  of  these  accounts  as 
they  would  appear  at  the  beginning  of  the  third  year's  business. 

10. 

(Forms  B  and  C) 

C  and  D  form  a  partnership.  It  is  agreed  that  C  is  to  have 
active  control  of  the  operation  of  the  enterprise.  He  furnishes 
a  nominal  amount  of  capital,  $500,  and  agrees  to  devote  his  entire 
time  and  energy  to  the  business.  D  invests  $9,500.  According 
to  the  agreement  D  is  to  receive  10%  on  his  investment  annually 
(provided  this  amount  is  earned)  and  C  is  entitled  to  all  residual 
income.  The  balance  of  the  Expense  and  Revenue  account  at 
the  close  of  the  year  is  $3,050.  Interest  charges  and  other  de- 
ductions amount  to  $850.  This  leaves  a  proprietary  income  of 
22%.  D  withdraws  during  the  year  just  the  amount  of  his  in- 
come.   C  withdraws  $1,400. 


SINGLE  PROPRIETORS  AND  PARTNERS  143 

Give  journal  entries  covering  these  transactions,  and  show 
the  partners'  drawing  and  capital  accounts  as  they  would  appear 
at  the  beginning  of  the  second  year. 


Special  Problems  in  Partnership  Accounting 

II. 

(Form  B) 

The  balance  sheet  of  A,  a  single  proprietor^  appears  as  fol- 
lows : 

Sundry  Assets $35,000     A,  Capital. $35,ooo 

A  new  proprietor  B,  is  now  admitted  as  a  partner.  B  buys  a  half 
interest  in  the  firm,  paying  A  $15,000  and  contributing  cash  and 
other  property  to  the  business  to  the  amount  of  $15,000. 

Give  journal  entries  covering  these  transactions  on  the  books 
of  the  new  firm  and  prepare  the  first  balance  sheet  of  the  part- 
nership. 

Suppose  that  C  now  buys  A's  interest  in  the  partnership 
for  $32,000.  What  would  be  the  entries  covering  this  transac- 
tion? 

12. 

"The  purchase  and  sale  price  of  a  share  in  proprietorship  in 
the  case  of  a  partnership  is  little  more  likely  to  indicate  the  book 
value  of  the  firm's  assets  than  is  the  price  of  a  share  of  stock  in 
the  case  of  a  corporation  likely  to  prove  a  reliable  index  at  all 
times  of  the  book  value  of  the  corporation's  assets." 

Discuss. 

13. 

(Form  B) 

The  following  is  the  balance  sheet  of  A  and  B,  equal  part- 
ners: 


144  PROBLEMS  AND  EXERCISES 

Assets  Equities 

Cash $  1,000  Accounts   Payable $  5,000 

Accounts  Receivable. .  .    10,000  Notes  Payable  ........     7,000 

Merchandise  5,ooo  A,  Capital 10,500 

Bldg.  and  Equip 17,000  B,  Capital 10,500 

$33,000  $33>ooo 

What  is  the  amount  of  proprietorship  according  to  this  state- 
ment ? 

The  firm  needs  more  capital  and  C  is  invited  to  become  a 
partner.  C  investigates  the  situation  and  finds :  that  of  the  out- 
standing accounts  probably  $1,000  will  never  be  collected;  that 
the  merchandise  account  should  be  written  down  $500  on  account 
of  shop  wear  and  obsolescence;  that  accrued  depreciation  on 
building  and  equipment  totals  $1,500  and  has  never  been  booked. 
He  ofl:ers  to  invest  cash  sufficient  to  give  him  a  one-fourth  interest 
on  the  basis  of  the  corrected  values  as  above  outlined.  A  and  B 
agree  to  this  propostion. 

Present  journal  entries  which  give  effect  to  the  new  valua- 
tion and  C's  investment  and  exhibit  the  new  balance  sheet  after 
these  entries  are  made. 

14. 

(Form  B) 

The  balance  sheet  of  a  partnership,  in  summary  form,  stands 
as  follows : 

Sundr>^  Assets $50,000     A,  Capital $30,000 

A,  Drawing 10,000     B,  Capital 30,000 


$60,000  ■  $60,000 

C  agrees  to  buy  out  A's  equity,  paying  A  $25,000  cash,  and 
contributing  $10,000  cash  to  the  business,  it  being  agreed  there- 
upon that  C  is  to  be  considered  an  equal  partner  with  B. 

Give  journal  entries  covering  A's  withdrawal  and  C's  entry, 
and  present  a  new  balance  sheet  at  the  conclusion  of  these  trans- 
actions. 


SINGLE  PROPRIETORS  AND  PARTNERS 


145 


15- 

(Form  B) 
(a)   On  Dec.  31,  1916,  the  balance  sheet  of  X  and  Y,  part- 
ners, in  summar}'  form  stands  as  follows : 

Merchandise   $20,000     X,  Capital $39,000 

Receivables  30,000     Y,  Capital 20,000 

Cash 10,000     Y,  Drawing 3,ooo 

X,  Drawing 5,ooo     Accounts  Payable 3,000 


$65,000  $65,000 

At  this  time  it  is  agreed  that  Z  shall  be  taken  in  as  a  new 
partner,  to  absorb  enough  of  X's  net  interest  and  contribute  suf- 
ficient cash  and  other  property  to  make  all  three,  X,  Y,  and  Z, 
equal  partners.  Z  insists  that  a  long-standing  customer's  ac- 
count amounting  to  $2,000  shall  be  written  off  as  worthless.  Z 
then  turns  over  to  the  firm  cash  amounting  to  $6,000,  equipment 
valued  at  $5,000,  and  pays  X  sufficient  cash  to  eft'ectuate  the  ar- 
rangement stated  above. 

Prepare  journal  entries  showing  Z's  admission  to  the  firm 
(closing  the  drawing  accounts),  and  exhibit  a  balance  sheet  of 
the  reorganized  partnership. 

(b)  Using  the  balance  sheet  given  under  (a)  above,  assume 
that  Z  buys  X  out  completely,  paying  him  $45,000  cash  and  there- 
by acquiring  a  three-fifths  interest  in  the  business,  that  accounts 
receivable  are  adjusted  as  above;  that  X  contributes  no  assets  to 
the  firm;  and  prepare  journal  entries  and  new  balance  sheet. 

16. 

"The  partnership  balance  sheet  may  be  constructed  from  sev- 
eral points  of  view.  From  a  managerial  standpoint  only  the  busi- 
ness assets  and  liabilities  need  be  considered.  From  the  point  of 
view  of  the  creditors,  however,  there  is  something  to  be  said  in 
favor  of  a  two-section  statement,  part  of  which  should  cover  the 
affairs  of  the  partnership  as  a  business  entity  and  part  the  out- 
side financial  interests  of  the  individual  partners." 

Discuss. 


I4S  PROBLEMS  AND  EXERCISES 

17- 

"Any  transaction  involving  a  genuine  net  revenue  item  from 
the  standpoint  of  the  business  as  a  whole  increases  both  of  the 
underlying  balance  sheet  classes  by  just  the  amount  of  the  net 
earning.  And  since  the  credit  to  revenue  and  the  concurrent 
charge  to  a  partner  on  account  of  interest  on  drawings  or  "bor- 
rowings" does  not  satisfy  this  test  there  is  no  true  revenue  in- 
volved in  such  an  adjustment." 

Argue  in  support  of  this  statement. 

1 8. 

A,  a  partner,  borrows  $12,000  from  the  firm  on  a  6%  note 
running  for  one  year,  interest  to  be  paid  semiannually.  At  the 
end  of  6  months  A,  being  short  of  funds,  makes  an  arrangement 
with  the  other  partners  that  his  capital  account  be  charged  for 
the  amount  of  interest  due.  What  account  should  be  concur- 
rently credited?  At  the  end  of  the  year  a  similar  adjustment  is 
made  and  the  note  is  renewed.  Explain  fully  the  significance  of 
such  transactions.  Suppose  that  A  lost  the  borrowed  funds  spec- 
ulating, would  a  creditor  consider  his  position  in  any  way  dis- 
turbed ? 

19. 

(Forms  B  and  C) 

L.  T.  Burman  and  George  W'isner  form  a  partnership,  Jan- 
uary I,  1916,  each  investing  $12,000.  Income  is  to  be  divided 
share  and  share  alike.  On  February  i,  Burman  becomes  financial- 
ly embarrassed  and  borrows  $5,000  from  the  firm,  giving  his  90- 
day  note  at  6%.  It  is  necessary  at  this  time  to  take  in  another 
partner,  H.  D.  Cumberland,  who  invests  $6,000.  The  articles 
of  co-partnership  are  amended  in  such  a  way  as  to  require  that 
each  partner  be  credited  at  the  close  of  the  current  year  with 
6%  interest  on  his  net  investment  from  February  i.  It  is  agreed 
that  all  residual  income  shall  be  divided  in  proportion  to  the 
equities  of  the  partners  as  they  appear  at  the  end  of  each  year, 
before  any  distribution  of  income  has  been  made.     Each  sue- 


SINGLE  PROPRIETORS  AND  PARTNERS  147 

ceeding  year  interest  is  to  be  credited  to  the  partners'  accounts 
for  the  entire  year  on  the  actual  investments. 

On  May  i,  Burman  takes  up  the  note  mentioned  above.  He 
does  not  pay  the  interest  in  cash,  but  an  agreement  is  made  that 
his  equity  account  is  to  be  charged  for  the  amount. 

During  the  year  Burman  makes  withdrawals  as  follows : 
March  15,  $250:  August  5,  $175;  December  31,  $450.  Wisner 
makes  no  withdrawals  whatever,  and  Cumberland  withdraws 
only  the  amount  of  net  income  accruing  to  him  (and  after  a  com- 
plete settlement  is  effectuated). 

Net  income  for  the  year  amounts  to  $3,750.  This  amount 
is  credited  to  the  partners'  accounts  in  accordance  with  the 
above  stipulations.  It  is  agreed  that  the  income  for  the  month  of 
January  shall  be  considered  as  one-twelfth  of  the  total. 

Journalize  all  the  above  transactions  in  so  far  as  the  partners' 
accounts  are  affected,  and  prepare  an  exhibit  of  these  accounts 
as  they  would  appear  Jan.  i,  1917. 

20., 
(Form  B) 
The  balance  sheet  of  Pryor  Bros,  appears  as  follows: 

Equipment   $15,000      A.  B.  Pryor $22,500 

Merchandise   30,000      C.  D.  Pryor 20,000 

Receivables  25,000      Notes  Payable 10.500 

Cash 100     Mortgage   20,000 

A.  B.  Pryor,  Drawing.  .         300 
C.  D.  Pryor,  Drawing.  .     2,600  .. 


$73,000     •  $73,000 

The  partnership  is  forced  into  bankruptcy  by  a  failure  to  meet 
interest  charges.  The  holders  of  the  notes  and  mortgages  agree 
to  pay  $50,000  for  the  business  as  it  stands.  In  this  purchase 
the  merchandise  is  valued  at  $22,000,  receivables  at  $19,000,  and 
equipment  at  $8,900.  Assuming  that  profits  and  losses  are  shared 
equally  by  the  partners,  give  the  entries  necessary  to  close  the 
books  of  the  partnership. 


XII 

CORPORATE  PROPRIETORSHIP— CAPITAL  STOCK 
Corporate  Proprietorship 


State  the  essential  characteristics  of  corporate  proprietorship. 
Explain  the  legal  relationship  between  the  corporate  organization 
and  the  individual  shareholder.  Contrast  the  position  of  the  in- 
vestor in  this  form  of  organization  with  that  of  a  partner  in 
a  co-partnership. 

2. 

Show  that  if  the  possibilities  inherent  in  the  corporate  form 
of  organization  for  subdividing  the  functions  of  ownership  among 
investors  were  fully  utilized  in  any  case  it  would  be  a  rather  dif- 
ficult matter  to  determine  just  which  securities  represented  pro- 
prietorship and  which  represented  liabilities. 


"Corporate  proprietorship,  in  the  sense  of  the  stockholders' 
equity,  is  a  highly  conventional  thing.  Strictly  speaking  there  is 
no  proprietor  other  than  the  corporate  entity  itself.  The  corpor- 
ation owns  the  assets.  The  individual  stockholder  has  no  title 
whatever  to  specific  assets.  He  simply  has  a  fractional  interest 
in  the  asset  total.  The  important  concept  for  the  accountant  in 
this  situation  is  that  of  a  residual  equity.  Such  an  equity  is  the 
common  stockholders'.  It  is  in  this  figure,  the  difi^erence  between 
the  asset  total  and  the  sum  of  the  equitable  interests  of  all  other 
investors,  that  the  estimates  and  judgments  of  the  accountant, 


CORPORATE  PROPRIETORSHIP  149 

the  significant  accounting  processes,  come  to  a  focus.  And  it  is 
the  trend  of  this  figure,  its  growth  or  diminution,  which  affords 
the  most  striking  evidence  of  financial  status  which  is  furnished 
by  the  accounts." 

Consider  this  statement  carefully,  and  restate,  with  explana- 
tions, in  your  own  words. 

4- 

The  following  represents  one  side  of  a  corporation  balance 
sheet : 

Capital  Stock  (Common)    $150,000 

Capital   Stock    (Preferred)    100,000 

First  Mortgage  Bonds  150,000 

Notes    Payable    25,000 

Accounts    Payable    72,000 

Other  Current  Liabilities 2,500 

Undivided  Profits  27,200 


$526,700 

What  is  the  amount  of  the  common  stockholders'  equity  as 
shown  by  this  statement  ? 

5- 

On  January  i,  1916,  the  capital  stock  of  a  corporation  is 
$175,000;  Surplus  is  $12,000^ mortgages  and  other  liabilities 
proper  amount  to  $40,000.*^  The  proprietary  income  during  the 
year  amounts  to  $25,000,  of  which  amount  $5,000  is  paid  in 
dividends.  What  is  the  excess  of  assets  over  outside  liabilities, 
December  31,  191 6?  Prepare  a  balance  sheet  consistent  with  the 
information  given. 

6. 

Explain  why  complete  proprietorship  accounts  must  be  kept 
in  the  case  of  a  corporation  of  any  complexity.  What  are  the 
principal  situations  giving  rise  to  transactions  which  affect  the 
proprietary  accounts? 


f>' 


150  PROBLEMS  AND  EXERCISES 

The  Transition  from  Partnership  to  Corporation 

7. 

The  assets  of  a  partnership  appear  on  the  books  at  a  total  of 
$75,000.  The  habihties  amount  to  $20,000.  A  corporation  is  or- 
ganized to  take  over  the  partnership,  the  authorized  capital  being 
$125,000,  par  $100.  The  partners  are  allowed  a  four-fifths  in- 
terest in  the  corporation  for  their  equities  in  the  partnership  as- 
sets, the  corporation  assuming  the  liabilities  as  they  stand.  The 
balance  of  the  authorized  stock  is  now  sold  at  $60  per  share. 

Exhibit  the  corporation's  first  balance  sheet,  giving  full  ex- 
planation of  any  doubtful  points. 

0-5,^  8. 

(Form  B) 

The  balance  sheet  of  A  and  B,  equal  partners,  stands  as  fol- 
lows just  before  the  firm  is  taken  over  by  a  corporation: 
Assets  Equities 

Real  Estate  and  Imp...  .$64,500     A,  Capital $30,000 

Merchandise 15,900     B,  Capital 30,000 

Customers"  Accounts. . .     5,000     Accounts  Payable 7,800 

Cash 2,600     Notes  Payable 20,200 

$88,000  $88,000 

The  new  corporation  receives  all  the  assets  except  the  cash 
and  assumes  the  accounts  payable  but  not  the  notes  payable. 
Real  estate  and  improvements  are  taken  over  at  a  value  of  $100,- 
000,  and  the  goodwill  of  the  partners  is  considered  to  be  worth 
$24,500.  Payment  is  made  to  the  partners  as  follows:  Cash, 
$33,100;  bonds  of  the  corporation  $50,000,  and  the  balance  in 
capital  stock  of  the  corporation. 

Give  the  journal  entries,  with  explanations,  necessary  to  close 
the  books  of  the  firm.  (Assume  that  the  valuations  which  the 
corporation  sets  upon  the  firm's  real  estate  and  goodwill  are  bona 
fide). 


CORPORATE  PROPRIETORSHIP  151 

Give  opening  entries  on  the  books  of  the  corporation  as  far 
as  the  above  transactions  are  concerned. 

_   9- 

(Form  B) 

The  following  represents  the  condition  of  the  ledger  of  C 
and  D,  partners,  Dec.  31,  1919,  after  the  process  of  closing  is 
complete : 

Dr.  Cr. 

Cash $  20,000 

Plant  60,000 

Merchandise  Inventory  40,000 

Notes  Receivable  20,000 

Customers'  Accounts   70,000 

C,  Drawings    15,000^ 

D,  Drawings  5,ood^ 

•^Accounts  Payable $  10,000 

C,  Capital    150,000- 

D,  Capital   50,000  - 

Undivided  Profits 20,000 


$230,000         $230,000 

The  partners  now  incorporate  a  company  with  an  authorized 
capital,  all  in  common  stock,  of  $275,000.  The  company  so  form- 
ed buys  all  the  assets  and  goodwill  of  the  partnership,  not  includ- 
ing cash,  for  $250,000,  payable  $200,000  in  stock  of  the  new  com- 
pany and  $50,000  cash;  the  cash  is  derived  from  E  and  F,  who 
subscribe  for  and  take  stock  to  the  amount  of  $75,000  at  par. 
The  accounts  payable  are  to  be  settled  by  the  partners.  This  ar- 
rangement is  carried  out.  The  articles  of  copartnership  require 
that  all  profits  be  shared  in  proportion  to  the  original  investments 
(the  capital  account  balances)  of  the  partners.  It  is  agreed  be- 
tween C  and  D,  however,  that,  after  all  transactions  with  the 
corporation  are  completed,  and  the  outstanding  accounts  are  re- 


152  PROBLEMS  AND  EXERCISES 

tired,  the  final  division  of  cash  and  securities  shall  be  in  propor- 
tion to  the  net  book  equities  of  the  respective  partners  as  they  ap- 
pear just  prior  to  such  division. 

(a)  Frame  necessary  journal  entries  to  close  the  books  of 
the  partnership  and  show  the  amount  of  cash  and  securities  re- 
ceived by  each  partner. 

(b)  Give  the  journal  entries  to  open  the  books  of  the  cor- 
poration and  prepare  a  balance  sheet  for  the  corporation  at  the 
conclusion  of  these  transactions. 


A 


^  V  (Form  B) 

The  Barnes  brothers  own  and  operate  a  small  canning 
factory.  Attracted  by  the  high  prices  of  war  munitions  they  de- 
cide to  build  an  addition  to  the  factory  building,  remodel  the 
machinery  and  buy  some  new  equipment  in  order  to  enter  this 
field.  These  changes  will  require  about  $25,000  of  additional 
capital.  It  is  decided  to  reorganize  as  a  corporation  in  order  that 
the  business  may  be  more  conveniently  expanded.  The  balance 
sheet  of  the  partnership,  in  summary  form,  appears  as  follows : 

Assets  Liabihties 

Plant  and  Equipment.  .$45,000     H.  A.  Barnes $25,000 

Materials  and  Supplies  28,000     J.  W.  Barnes 35,ooo 

Cash  2,500     Accounts  Payable i8,2(5b 

Other  Current  Assets. .    12,600      Notes  Payable 9,000 

Accrued  Items 990 

$88,100  $88,100 

The  partnership  is  reorganized  as  a  corporation,  the  Barnes 
Manufacturing  Co.  Capital  Stock  is  authorized  to  the  amount  of 
$125,000.  The  entire  amount  is  subscribed  at  par. (^ The  partners 
receive  $76,000  in  stock;  their  equities  in  the  partnership  being 
considered  as  full  paymenT)  The  holders  of  the  partners'  notes 
to  the  full  amount  of  $9,000  are  induced  to  take  stock  in  the  new 


CORPORATE  PROPRIETORSHIP 


153 


enterprise  for  the  same  amount.  A  steel  company  which  has 
an  open  account  against  the  partnership  for  $5,000  for  materials 
purchased  takes  stock  to  that  amount  in  full  settlement  of  the 
account.  The  other  subscriptions  are  all  paid  in  cash.  The 
liabilities  of  the  partnership  are  assumed  by  the  corporation,  and 
the  assets  taken  over. 
Prepare : 

(a)  Closing  entries  for  the  partnership. 

(b)  Opening  entries  for  the  corporation. 

(c)  The  balance  sheet  of  the  corporation  as  it  appears  after 
the  conclusion  of  the  foregoing  transactions. 

II. 

(Form  B) 

E.  B.  Johnson  and  Son  operate  a  fish  farm.     The  firm's 
balance  sheet,  Dec.  31,  1916,  appears  as  follows: 

Assets  Liabilities 

Land $15,000  E.  B.  Johnson $15,000 

Buildings 9,000  D.  \\'.  Johnson 10,000 

Equipment 12,500  Mortgage 10,000 

Receivables  750  Accounts  Payable 2,950 

Supplies 500 

Cash 200 


$37,950  $37-95C 

The  business  is  yielding  a  ver}'-  high  rate  of  return,  and  can 
fill  but  a  small  part  of  its  orders.  The  partners  estimate  that 
additional  equipment  to  cost  $15,000  will  make  possible  a  100% 
increase  in  output.  To  raise  this  capital  it  is  decided  to  organize 
as  a  corporation.  A  capital  of  $75,000  is  authorized.  The  part- 
ners agree  to  subscribe  for  200  shares  at  par  ($100),  and  to  pay 
these  subscriptions  in  cash,  provided  the  balance  of  the  stock  is 
sold  at  par  for  cash.  After  the  corporation  is  organized  the  part- 
ners turn  over  to  the  corporation  the  assets  of  the  partnership 


154  PROBLEMS  AND  EXERCISES 

for  a  cash  consideration  of  $60,000.  The  corporation  is  to  as- 
sume the  outstanding  mortgage  but  the  partners  agree  to  retire  all 
open  accounts.  The  stock  is  sold  through  the  personal  solicitation 
of  the  partners,  and  the  corporation  is  organized  as  above  out- 
lined. In  their  selling  campaign  the  partners  predict  a  wonderful 
future  for  the  enterprise  because  of  the  uniqueness  of  the  in- 
dustry, the  advantageous  location  of  the  plant,  and  the  difficulties 
faced  by  competitors  because  of  the  peculiar  skill  required  for 
successful  operation.  The  stock  is  sold  for  the  most  part  in 
small  lots. 

(a)  Give  the  journal  entries  necessary  to  close  the  books 
of  the  partnership. 

(b)  Give  the  opening  entries  for  the  corporation. 

(c)  Prepare  a  balance  sheet  for  the  corporation,  after  the 
conclusion  of  the  above  transactions. 

(d)  Criticize  the  agreement  made  between  the  partners  and 
the  corporation. 

Organizatiox — Stock  Issued  for  Cash  and  Other  Assets 

12. 

(Form  B) 

One  year  later  (continuing  Problem  15,  (a),  Chapter  XI) 
the  partnership  books,  after  closing,  show  sundry  asset  balances 
of  $65,000;  cash  $10,000;  sundry  liabihties  $15,000;  a  debit  pro- 
fit and  loss  balance,  $6,000.  The  partner's  accounts  are  un- 
changed. In  the  meantime  Z  has  secured  some  munitions  con- 
tracts and  it  is  decided  to  incorporate  and  expand  the  business. 
The  X  Company  is  accordingly  organized  on  Jan.  i,  1918,  with 
an  authorized  capital  of  2,000  shares  common  stock  and  500 
shares  8%  preferred,  par  $100  in  each  case.  S  subscribes  for  400 
shares  preferred  at  par;  W  subscribes  for  50  shares  preferred  at 
par.  Each  of  the  partners  subscribes  for  500  shares  common  at 
$90.    On  Jan.  15,  these  subscriptions  are  paid  as  follows  :    S  turns 


CORPORATE  PROPRIETORSHIP  '  155 

over  a  plant  which  he  owns  and  $5,000  cash.  W  pays  cash.  The 
partners  turn  over  all  the  partnership  assets  (furnishing  all  neces- 
sary papers,  and  pay  $25,000  cash  each.  The  X  Company  as- 
sumes all  partnership  liabilities.  On  Jan.  16,  250  shares  of  com- 
mon stock  are  made  out  in  favor  of  Z  and  he  assigns  his  con- 
tracts to  the  X  Company.  On  Jan.  17,  stock  is  issued  covering 
all  the  paid  subscriptions  and  the  balance  of  the  preferred  stock 
is  sold  and  issued  to  K  at  $95  per  share. 

Prepare  closing  entries  for  the  partnership,  opening  entries 
for  the  X  Company,  and  a  balance  sheet  for  the  X  Company  at 
the  conclusion  of  the  foregoing. 

13- 

(Form  B) 
The  Harvey  and  Crowder  Company  is  a  partnership  engaged 
in  a  general  mercantile  business.    The  balance  sheet  on  January 
I,  1916,  appears  as  follows: 

Assets  Liabilities 

Real  Estate $26,000      L.  W.  Harvey $25,500 

Merchandise 79,200     John  Crowder   61,000 

Fixtures 4.600     Mortgage 25,000 

Accounts  Receivable  .  .     2,000     Notes  Payable   4.500 

Equipment 5.200     Accounts  Payable   12,350 

Misc.  Supplies  2,900     Accrued  Items 300 

Prepaid  Services i,95o 

Cash  6,800 


$128,650  $128,650 

A  promoter,  anticipating  an  expansion  in  this  line  of  m- 
dustry,  organizes  a  corporation  to  be  known  as  the  Michigan 
IMercantile  Company  for  the  purpose  of  taking  over  the  Harvey 
and  Crowder  Company.  The  authorized  capital  of  the  new 
company  is  $250,000,  consisting  of  1,750  shares  of  preferred,  par 
100,  and  the  balance  of  common  stock  with  the  same  par  value. 
One  share  of  common  stock  is  to  be  given  as  a  bonus  with  every 


156  PROBLEMS  AND  EXERCISES 

5  shares  of  preferred  subscribed.  Harvey  subscribes  $30,000  in 
the  preferred  capital  stock  of  the  new  enterprise.  Crowder 
subscribes  for  preferred  stock  to  the  amount  of  $50,000.  Mis- 
cellaneous persons  subscribe  for  500  shares  preferred.  One  hun- 
dred shares  of  common  stock  are  sold  for  $10  per  share.  All  the 
above  subscriptions  are  paid.  Harvey  pays  his  subscription  in 
full  by  turning  over  his  equity  in  the  partnership.  Crowder 
secures  his  stock  at  the  same  rate  of  discount  as  does  Harvey  and 
receives  cash  for  the  balance  of  his  equity  in  the  old  company. 
The  liabilities  of  the  partnership  are  assumed  by  the  Michigan 
Mercantile  Company  as  they  stand,  and  all  the  assets  are  taken 
over. 

Prepare : 

(a)  Closing  entries  for  the  partnership, 

(b)  Opening  entries  for  the  corporation. 

(c)  A  balance  sheet  of  the  corporation  at  the  conclusion  of 
the  foregoing  transactions. 

14. 

(Form  B) 

The  X  Co.  organizes  under  the  laws  of  the  state  of  Delaware 
to  conduct  a  manufacturing  business.  The  authorized  capital 
is  $1,000,000,  par  $100,  divided  equally  between  preferred  and 
common  stock.  Five  incorporators  subscribe  for  100  shares  each 
of  the  common  stock  at  par.  These  subscriptions  are  paid.  An 
issue  of  bonds  amounting  to  $500,000  is  authorized.  A  Mr.  Wes- 
ton buys  from  three  manufacturers  their  fully  equipped  plants 
for  $950,000  cash.  He  then  turns  over  these  plants  to  the  newly 
organized  X  Co.  for  the  balance  of  the  authorized  stock  issued, 
and  $400,000  of  the  first  mortgage,  5%  bonds  authorized.  This 
leaves  $100,000  of  the  said  bonds  in  the  Company's  treasury. 

Exhibit  opening  entries  covering  the  above  transactions  on 
the  books  of  X  Co.,  and  present  a  balance  sheet  statement  of  the 
Company's  financial  position  at  the  conclusion  of  the  foregoing. 
Discuss  any  doubtful  points. 


CORPORATE  PROPRIETORSHIP  157 

(Form  B) 

The  Black  and  White  Co.  was  organized  on  Jan.  i,  1918,  with 
an  authorized  capital  (all  common  stock)  of  10,000  shares,  par 
$100.  The  stock  was  all  subscribed  at  $90  per  share,  the  sub- 
scription agreement  (in  the  case  of  cash  subscriptions)  calling 
for  payment  in  three  equal  monthly  installments.  The  first  in- 
stallment was  called  Feb.  i.  All  installments  were  duly  called 
and  paid  in  full  except  in  connection  with  one  subscription  cover- 
ing a  block  of  50  shares.  In  this  case  the  subscriber  defaulted 
after  paying  one  installment ;  and  the  amount  paid  in  is  not  re- 
coverable. All  subscriptions  call  for  cash  with  the  exception  of 
that  of  j\Ir.  A.  H.  Black,  who  turned  over  the  following  assets  in 
payment  of  a  subscription  for  5,000  shares :  real  estate,  $100,- 
000;  buildings,  $100,000;  patents,  $100,000;  equipment,  $100,000; 
merchandise,  $30,000.  These  assets  were  turned  over  to  the  cor- 
poration on  the  date  the  third  installment  on  cash  subscriptions 
was  called.  The  corporation  paid  Air.  Black  $20,000  cash  and 
allowed  him  $20,000  on  his  subscription  for  his  services  in  organ- 
izing the  company  and  securing  certain  government  contracts. 
The  shares  obtained  by  subscription  default  are  sold  for  cash  on 
the  market  @  85. 

Prepare  journal  entries  covering  these  opening  transactions 
and  exhibit  the  corporate  balance  sheet  at  their  conclusion. 

16. 

(Form  B) 
A  corporation  is  organized  with  an  authorized  capital  stock 
of  $200,000,  par  $10.  Of  this  amount  $180,000  is  subscribed 
at  a  10%  discount.  Subscriptions  to  the  amount  of  $100,000 
(par)  are  paid  by  turning  over  to  the  corporation  a  small  manu- 
facturing plant  ready  for  operation ;  the  remaining  subscriptions 
are  paid  in  cash.  After  a  year's  operation  it  is  decided  to  re- 
organize in  order  to  secure  further  working  capital.  Holders  of 
10,000  shares  of  stock  are  induced  to  subscribe  at  par  for  $100,000 


158  PROBLEMS  AND  EXERCISES 

of  newly  authorized  preferred  stock,  par  $ioo.  These  subscrip- 
tions are  paid  by  surrendering  the  old  stock  certificates  on  the 
basis  of  $9  per  share,  the  balance  being  paid  in  cash. 

First  mortgage  bonds  are  authorized,  $50,000,  and  are  sold 
at  par. 

Give  journal  entries  covering  the  above  transactions,  and 
prepare  a  balance  sheet  consistent  with  these  occurrences. 

17- 

(Form  B) 

The  A.  and  B.  companies  are  competing  manufacturing  con- 
cerns.    It  is   decided  to   organize  an  enterprise  known  as  the 

A.  B.  Company  for  the  purpose  of  combining  the  interests  of  the 
two  companies.  The  A.  Co.  has  an  outstanding  capital  stock  of 
$250,000  (par  $100).  On  the  last  balance  sheet  of  this  company 
the  Surplus  account  showed  a  balance  of  $50,000.  Outside 
liabilities  totaled  $75,000.  The  B.  Co.  has  a  capital  stock  out- 
standing of  $300,000.  On  the  last  balance  sheet  the  Surplus 
appeared  at  $25,000.     Other  liabilities  totaled  $35,000.     The  A. 

B.  Company  has  an  authorized  capital  stock  of  $1,000,000.  Sub- 
scriptions at  par  amounting  to  $520,000  are  received.  The  sub- 
scriptions are  paid  as  follows:  (i)  stock  of  the  A.  Co.  to  the 
amount  of  $225,000  at  $120  per  share;  (2)  stock  of  the  B.  Co. 
to  the  amount  of  $250,000  at  par. 

Give  journal  entries  covering  these  transactions  on  the  books 
of  the  A.  B.  Company,  and  prepare  a  balance  sheet  showing  the 
status  of  the  holding  company  at  this  time. 

18. 

(Form  B) 
Some  months  later  (continuing  Problem  17)  further  subscrip- 
tions are  received  in  the  stock  of  the  A.  B.  Co.  to  the  amount  of 
$250,000  at  par.     These  subscriptions  are  paid  as  follows:     (i) 
stock  of  the  A.  Co.  to  the  amount  of  $25,000  at  $120  per  share; 


CORPORATE  PROPRIETORSHIP  159 

(2)  stock  of  the  B.  Co.  to  the  amount  of  $50,000  at  par;  (3) 
the  balance  in  cash.  The  A.  B.  Co.  assumes  all  the  outside 
liabilities  of  the  A.  Co.  (now  increased  by  $10,000  over  the  last 
balance  sheet  figures)  and  immediately  retires  outstanding  notes 
amounting  to  $25,000.  The  liabilities  of  the  B.  Co.  (now  de- 
creased by  $5,000)  are  assumed  by  the  new  corporation. 

All  the  stock  of  the  subsidiary  companies  having  been  pur- 
chased by  the  A.  B.  Co.  the  old  organizations  are  dissolved  and 
the  assets  are  taken  over.  The  assets  of  the  A.  Co.  appear  on  the 
books  of  that  company  as  follows:  Plant  and  Machinery, 
$250,000;  Receivables,  $80,000;  SuppHes,  $20,000;  Cash,  $5,000; 
Patents,  $35,000.  The  Surplus  account  now  shows  a  balance  of 
$55,000.  These  assets  are  all  taken  over  at  their  book  value. 
The  balance  sheet  of  the  B.  Co.  at  this  time  shows  assets  as  fol- 
lows: Real  Estate,  $65,000;  ^lachinery  and  Tools,  $150,000; 
Materials  and  Supplies,  $30,000;  Receivables,  $70,000;  Patents, 
$30,000 ;  Cash,  $20,000.  The  Surplus  account  at  this  time  shows 
an  increase  of  $10,000.  All  the  assets  of  the  B.  Co.  are  taken  over 
at  book  value  with  the  exception  of  the  patents  which  are  entered 
on  the  books  of  the  A.  B.  Co.  at  a  value  of  $5,000. 

Prepare : 

(a)  An  exhibit  of  the  balance  sheets  of  the  subsidiary  com- 
panies at  the  moment  of  the  final  merger. 

(b)  Closing  entries  for  the  A.  and  B.  companies. 

(c)  The  opening  entries  on  the  books  of  the  A.  B.  Co. 

(d)  The  balance  sheet  of  the  A.  B.  Co.  at  the  conclusion  of 
the  above. 

Donated  and  Treasury  Stock 

ig. 

Explain  the  nature  of  each  of  the  following  items:  capital 
stock  authorized;  capital  stock  outstanding;  stock  subscribed; 
subscriptions;  donated  stock;  treasury  stock;  donated  surplus; 
discount  on  stock. 


i6o  PROBLEMS  AND  EXERCISES 

20. 

(Form  B) 

A  corporation  is  organized  to  exploit  a  mining  property. 
Authorized  capital  is  5,000  shares,  par  $100.  There  are  three 
original  incorporators  each  of  whom  subscribes  for  10  shares. 
These  subscriptions  are  paid  in  cash.  One  of  the  incorporators 
is  the  owner  of  mineral  lands  which  he  now  agrees  to  turn  over  to 
the  corporation  in  exchange  for  2,500  shares  of  stock.  This 
transaction  is  consummated.  Later  this  individual  donates  750 
shares  of  stock  to  the  company  to  be  sold  to  raise  working  capital. 
This  stock  is  sold  at  a  discount  of  30%. 

Give  journal  entries  covering  the  foregoing  transactions  and 
prepare  a  balance  sheet. 

21. 

'"The  distinction  between  authorized  but  unissued  stock, 
donated  stock,  and  treasur}-  stock  is  not  fundamental  as  far  as  the 
balance  sheet  is  concerned.  Xone  of  these  items  are  in  any  de- 
gree assets.  In  fact,  it  may  be  said  that  in  no  case  can  the  stocks, 
bonds,  or  other  securities  of  a  corporation  constitute  an  asset  in 
the  hands  of  the  issuing  company,  however  acquired.  It  is  a  mat- 
ter of  no  consequence  that  cash  may  be  paid  for  such  stock.  A 
corporation  may  disburse  cash  for  two  main  purposes,  to  acquire 
valuable  structures,  commodities,  or  services,  or  to  retire  liabilities 
and  other  equities.  The  'purchase'  of  an  outstanding  security  be- 
longs to  the  second  class. 

"On  the  other  hand,  while  donated  stock  cannot  possibly  rep- 
resent an  asset,  the  donated  'surplus'  variously  called  'working 
capital',  'reser^-e  for  stock  donations,'  and  'special  stock  premi- 
um') that  arises  may,  conceivably,  constitute  a  genuine  capital 
surplus.  It  all  depends  upon  the  actual  value  of  the  property 
which  the  corporation  originally  receives  from  the  donor  of  the 
stock.  If  this  property  is  really  worth  more  than  the  par  value 
of  the  stock  retired,  a  true  stock  premium  has  arisen.'" 

Discuss,  supporting  the  argument  in  the  first  paragraph  by 
an  analogy  from  the  individual's  affairs.    Under  what  conditions 


CORPORATE  PROPRIETORSHIP  i6i 

would  a  subscriber  be  willing  to  make  a  true  donation,  i.e.,  pay  a 
premium  for  his  stock?  In  a  particular  case,  how  would  you 
test,  on  the  basis  of  subsequent  events,  the  validity  of  the  supposed 
premium  ? 

22. 

(Form  B) 
The  X  Mining  Co.  is  incorporated  with  an  authorized  capital 
stock  of  $200,000,  par  $10  per  share.  Subscriptions  for  stock  are 
taken  to  the  amount  of  15,500  shares  at  par.  These  subscriptions 
are  paid  as  follows:  mineral  lands,  $100,000;  water  rights,  $54,- 
000;  the  balance  in  cash.  A,  a  stockholder  who  furnished  the 
water  rights  as  payment  for  a  subscription  of  6,000  shares,  donates 
4,000  sliares  to  the  corporation  for  the  purpose  of  raising  working 
capital.  This  stock  is  reissued  at  an  average  price  of  $8  per 
share. 

(a)  Journalize  the  above  transactions,  using  only  the  general 
ledger  accounts,  and  prepare  a  balance  sheet,  assuming  the  land 
and  water  rights  have  bona  fide  values  as  given  above.  In  this 
event  what  premium  does  A  really  pay  for  his  stock?  How 
much  does  he  actually  lose  ? 

(b)  Assuming  the  water  rights  are  worth  but  $16,000  how 
should  the  above  entries  and  balance  sheet  be  changed?  Which 
of  the  two  statements  which  you  have  prepared  do  you  consider 
to  be  the  most  reliable  expression  of  the  Company's  true  position? 
Give  reasons. 

23. 

(Form  B) 

Sometime  later  (referring  to  Problem  22  above)  the  direct- 
ors of  the  X  Company,  finding  that  the  ore  deposits  are  becoming 
somewhat  depleted  and  being  in  a  strong  cash  position,  decide  to 
reduce  the  outstanding  stock.  They  accordingly  buy  1,000  shares. 
Five  hundred  shares  are  secured  at  book  value,  but  they  are  forced 
to  pay  $12  per  share  for  the  remaining  500. 

Give  journal  entries  giving  effect  of  these  transactions.    To 


1 62  PROBLEMS  AND  EXERCISES 

determine  book  value  use  the  balance  sheet  which  you  prepared 
under  (b)  above  and  assume  that  the  undistributed  profits  total 
$27,000.)  How  are  the  remaining  stockholders  affected  by  this 
procedure  ? 

Subsidiary  Prgprietc^y  Records 

24. 

Explain  the  function  of  each  of  the  following  books:  sub- 
scription ledger,  installment  book,  stock  ledger,  stock  certificate 
book,  stock  journal.  Are  these  books  essential  to  the  financial 
records  of  every  corporation? 

25- 

(Forms  B  and  C) 

Journalize  and  post  the  following  transactions  covering  the 
early  history  of  the  Sheel  Mfg.  Co. 

July  5.  The  Company  is  incorporated.  Authorized  stock, 
all  common,  totals  $50,000,  par  $10.  A.  S.  Sheel,  R.  B.  Sheel, 
and  James  Durfee  subscribe  at  par  for  1,000  shares  each.  Terms : 
$2  per  share  down,  the  balance  to  be  paid  in  two  equal  install- 
ments due  Sept.  30  and  Dec.  30. 

July  10.  R.  V.  Squier  subscribes  for  100  shares;  B.  J. 
Lansing,  200  shares;  W.  D.  Schmitz,  1,000  shares,  and  S.  P.  Roll- 
ins and  D.  R.  Rich,  300  shares  each.  The  terms  of  these  sub- 
scriptions are  the  same  as  above. 

Sept.  15.  A  call  for  the  installment  due  on  the  30th  is  sent 
the  various  subscribers. 

Sept.  29.  Checks  are  received  from  the  Sheels,  Durfee,  and 
Rollins  covering  their  installments  due  on  the  30th. 

Sept.  30.  Checks  are  received  for  proper  amounts  from  all 
remaining  subscribers  except  R.  V.  Squier. 

Nov.  10.  Irving  Abbot  buys  50  shares  of  stock  at  par,  pay- 
ing cash.  An  appropriate  certificate  is  made  out  and  issued  to 
him. 


CORPORATE  PROPRIETORSHIP  163 

Nov.  15.  R.  V.  Squier  pays  his  past  due  installment  with 
interest  at  6%  for  the  period  since  Sept.  30. 

Dec.  15.  Following  lengthy  negotiations  a  factory  building 
is  purchased  from  Sheel  Bros.,  partners,  for  $15,000.  A  pay- 
ment of  $5,000  is  made  and  the  corporation  gives  its  note  for  the 
balance. 

Dec.  16.  Irving^Abbott  sellsiik  stock  to  R.  B.  Sheelior  $11 
per  share. 

Dec.  17,  A  call  for  the  installment  due  Dec.  30th  is  sent  to 
the  various  subscribers. 

Dec.  28-30.     Checks  are  received  for  all  installments  due. 

Jan.  3.  Certificates  of  stock  are  mailed  to  the  various  sub- 
scribers, y 

Jan.  25.     B.  J.  Lansing  sells  100  shares  toJR^  V.  Squier  @  // 
9^.  ^^^  "  ^^ 


XIII 

CORPORATE  PROPRIETORSHIP— SURPLUS 
ACCOUNTS 

Capital  Surplus  and  Deficit 


(Form  B) 
The  Superior  and  Western  Copper  Company  organizes  with 
an  authorized  capital  of  $2,000,000,  all  in  common  stock.  The 
holders  of  this  stock  have  invested  cash,  or  assets  equivalent  to 
cash,  amounting  to  $1,500,000.  Give  journal  entries  covering 
the  organization  transactions,  and  show  the  balance  sheet  as  it 
would  appear  after  these  transactions  are  recorded. 

2. 

(Form  B) 

The  Lapeer  Merchants  Bank  organizes.  Its  authorized  capi- 
tal amounts  to  $200,000,  divided  into  2,000  shares  of  common 
stock.  This  stock  is  all  subscribed  at  120.  The  subscriptions  are 
paid. 

Journalize  on  the  books  of  the  corporation.  What  is  the 
significance  of  the  premium  on  stock  item  and  account? 

John  Borlan  buys  20  shares  of  this  stock  at  120.  Give  the 
entries  covering  this  transaction  on  his  books.  Discuss  the  ac- 
counting procedure  for  this  case. 

3. 

The  X  Company  issues  a  block  of  preferred  stock  (par 
$10,000)  @  $105,  giving  as  a  "bonus"  therewith  common  stock  of 
an  equal  par  value.  There  is  an  established  market  for  the  com- 
mon stock  at  $20. 


CORPORATE  PROPRIETORSHIP  165 

Give  summary  journal  entries  covering  this  transaction  on 
the  X  Co.'s  books.  Can  there  be  any  discount  or  premium  especi- 
ally applicable  to  preferred  stock?  In  other  words,  can  the  proper 
accounting  expression  for  the  preferred  stockholders'  equity  be 
more  or  less  than  par,  depending  upon  the  issuing  price? 

4- 

A  company's  balance  sheet  stands*as  follow^s : 

Assets  Liabilities 

Plant  &  Equipment. $1,500,000  Capital   Stock    $1,600,000 

Other  Assets 200,000  Bonds  200,000 

Discount  on  Stock. .      250,000  Surplus  150,000 

$1,950,000  $1,950,000 

An  auditing  accountant  recommends  that  discount  on  stock 
to  the  amount  of  $150,000  be  charged  against  surplus,  arguing 
that  a  company  cannot  show  a  deficit  and  a  surplus  at  the  same 
time.    Give  your  opinion. 

5- 

A  certain  company  paid  cash  dividends  from  its  stock  prem- 
iums.    Explain  just  what  this  means  and  criticize. 

6. 

(Form  B) 

The  Adventure  Mining  Co.  issued  its  stock  (10,000  shares, 
par  $25)  at  $15  per  share  in  1908.  In  November,  191 2,  an  assess- 
ment of  $5  per  share  was  called.  The  assessment  was  paid  on 
all  but  500  shares.  These  were  forfeited  to  the  Company  because 
of  this  default  and  were  sold  by  the  Company  at  public  auction 
for  $8  per  share. 

Give  journal  entries  on  the  books  of  the  corporation  cover- 
ing the  call,  its  payment,  and  the  seizure  and  sale  of  the  500  shares 
on  which  assessments  were  defaulted.  Show  that  the  possibility 
that  the  amount  of  the  discount  may  be  required  by  the  issuing 


1 66  PROBLEMS  AND  EXERCISES 

company  (or  by  the  courts  in  case  of  insolvency)  gives  an  added 
reason  for  the  retention  of  the  amount  of  the  discount  as  an  ac- 
counting fact. 

Accumulated  Profit  and  Loss 

7- 

The  assets  of  a  company  are  as  follows :  Buildings,  $42,600 ; 
Real  Estate,  $16,500;  Merchandise,  $31,800;  Notes  and  Accounts 
Receivable,  $10,200;  Other  Assets,  $3,000.  The  formal  equities 
are  as  follows:  Capital  Stock,  $50,000;  Mortgages,  $20,000; 
Notes  and  Accounts  Payable,  $10,970;  Miscellaneous  Liabilities, 
$200.    The  stock  was  issued  at  par.    Construct  a  balance  sheet. 

8. 

(Form  B) 

The  following  represents  one  side  of  a  corporation's  balance 
sheet  on  December  31,  191 5: 

Capital  Stock $280,000 

Bonds    165,000 

Notes  and  Accounts  Payable   220,000 

Other  Current  Liabilities 12,600 

$677,600 

The  assets  total  $649,400.  Stock  and  bonds  were  sold  at 
par.  The  Expense  and  Revenue  account  December  31,  19 16, 
shows  a  credit  balance  of  $3,500.  Interest  requirements  amount 
to  $9,300.  Assuming  these  charges  are  all  met,  journalize.  Pre- 
pare a  balance  sheet  as  at  December  31,  1916. 

9. 

A  certain  corporation  has  a  cash  balance  of  $12,000;  the 
surplus  account  shows  a  credit  balance  of  $75,000.  The  manage- 
ment decides  to  make  extensive  improvements  on  the  plant  calling 
for  an  immediate  cash  outlay  of  $50,000.    At  a  meeting  of  the 


CORPORATE  PROPRIETORSHIP  ifj 

directors  called  to  consider  the  project  the  general  manager  asks 
the  board  to  approve  a  plan  for  borrowing  $45,000  on  short-term 
paper.  One  director  suggests  that  it  would  be  good  policy  to  use 
the  surplus  for  making  the  necessary  extensions,  and  thus  avoid 
borrowing. 

Explain  to  this  director  the  fallacy  in  his  suggestion. 

10. 

The  auditor  of  an  incorporated  company  which  has  been  ac- 
customed to  making  investments  in  interest-paying  securities  in 
making  his  statement  to  the  directors  presented  a  balance  sheet 
showing  a  surplus  of  $65,000.  After  discussion  the  directors  de- 
cided that  they  did  not  wish  to  declare  a  dividend  out  of  the  sur- 
plus and  gave  their  auditor  the  following  order:  "Reduce  the 
surplus  by  investing  $50,000  in  the  bonds  of  the  X  Railroad  Co." 

Assuming  that  there  was  an  item  of  cash,  $75,000,  in  the 
aforesaid  balance  sheet,  what  effect  will  the  carrying  out  of  the 
directors'  order  have  upon  the  surplus  of  $65,000.  Explain  care- 
fully. 

II. 

"The  juggling  of  depreciation  charges  or  other  improper  ac- 
counting policies  cannot  be  justified  even  if  its  purpose  is  to  iron 
out  the  fluctuations  in  net  revenue  so  that  a  stable  dividend  rate 
may  be  established." 

Show  that  dividend  appropriations  may  be  stabilized  by  the 
use  of  the  Undivided  Profits  account  as  a  net  revenue  reservoir. 

Dividend  Appropriations 

12. 

(Form  B) 

The  directors  of  the  Jean-Roche  Co.,  at  their  meeting  on 
Jan.  2,  192 1,  declared  a  common  stock  dividend  of  $500,000,  par, 
and  a  special  dividend  payable  in  $100,000,  par,  of  the  Company's 


168  PROBLEMS  AND  EXERCISES 

convertible  5%  bonds,  payable  to  common  stockholders  on  March 
I  to  stock  of  record  Feb.  i.  In  addition  the  regular  cash  dividend 
of  7%  on  the  preferred  stock  outstanding  (par  $2,000,000)  pay- 
able March  i,  to  stock  of  record  Feb.  i,  was  declared. 

(a)  Give  dated  journal  entries  covering  the  declaration  and 
payment  of  these  dividends. 

(b)  Assuming  that  the  stock  of  the  Company  is  actively 
traded  in,  show  that  if  a  balance  sheet  were  prepared  on  Feb.  28, 
the  Dividends  Payable  account  would  not  represent,  exactly,  an 
equity  of  the  current  list  of  stockholders. 

(c)  What  effect  will  the  issue  of  the  stock  dividend  have 
upon  the  total  book  equity  of  the  common  stockholders?  Upon 
the  market  price  of  the  stock  per  share?  Why  should  the  rumor 
of  such  a  dividend,  and  even  its  declaration,  have  an  opposite 
effect  upon  selling  value  per  share? 

(d)  If  the  Company's  convertible  bonds  have  an  established 
market  at  $80  at  the  time  of  the  bond  dividend,  how  would  you 
alter  the  entries  made  above,  if  at  all? 

13. 

(Form  B) 

The  Mono  Distilling  Co.  decided  to  dispose  of  its  finished 
stock  by  paying  a  dividend  in  merchandise.  Accordingly  goods 
having  a  cost  (and  book)  value  of  $300,000  and  a  selling  value 
of  $800,000  were  distributed  to  the  stockholders. 

Journalize  the  declaration  and  payment  of  this  dividend,  (a) 
assuming  the  Company  had  no  undivided  profits  and  (b)  that  the 
surplus  account,  prior  to  the  declaration,  showed  a  credit  balance 
of  $50,000. 

14. 

(Form  B) 

The  Slidell  Lumber  Co.  is  organized  to  cut  a  definite  tract  of 
timber  and  provision  is  made  for  the  dissolution  of  the  Company 
as  soon  as  its  raw  material  is  exhausted.    For  the  year  1920,  oper- 


CORPORATE  PROPRIETORSHIP  169 

ating  net  revenue,  after  the  deduction  of  adequate  depletion,  is 
$150,000.  The  surplus  account  at  this  time  shows  undivided 
profits  from  previous  years  of  $25,000.  The  cash  balance  is 
$320,000,  and  the  directors  decide  that  they  can  pay  a  cash  divid- 
end of  $275,000.  Such  a  dividend  is  declared  and  paid. 
Give  journal  entries  and  discuss. 

15. 

(Form  B) 

The  proprietary  accounts  in  the  balance  sheet  of  the  B  Co. 
stand  as  follows:  Common  Stock  Authorized,  $3,000,000;  6% 
Preferred  Stock  Authorized,  $1,500,00;  Unissued  Common  Stock, 
$1,000,000;  Surplus,  $2,700,000. 

(a)  What  is  the  amount  of  proprietorship?  What  is  the 
book  value  of  the  common  stockholders'  equity? 

(b)  The  Company  issues  a  stock  dividend  to  the  common 
shareholders  for  the  amount  of  the  authorized  unissued  stock. 
Give  entries  and  discuss.  What  are  the  principal  reasons  under- 
lying the  issue  of  such  dividends,  so-called?  What  is  there  that 
is  unfortunate  about  this  practice  from  the  accounting  stand- 
point? 

(c)  The  directors  now  decide  that  it  would  be  wise  to  use 
a  part  of  the  remaining  surplus  to  reduce  the  amount  of  prefer- 
red stock  outstanding.  Accordingly  they  instruct  the  treasurer 
to  buy  5,000  shares  on  the  open  market.  This  instruction  is  car- 
ried out,  the  shares  being  secured  at  an  average  price  of  $96. 
Give  journal  entries  and  discuss. 

16. 

The  United  States  Supreme  Court  has  decided  that  stock 
"dividends"  are  not  income  to  the  recipient.  Is  this  sound  from 
an  accounting  standpoint?  Are  cash  dividends  income  to  the 
stockholder  in  the  sense  that  his  total  wealth  is  increased  through 
the  receipt  of  such  a  dividend? 


lyo  PROBLEMS  AND  EXERCISES 

Sinking  Fund  Appropriations 

17. 

(Form  B) 

The  balance  sheet  of  a  corporation,  before  any  profits  for  the 
year  have  been  distributed,  shows  the  following  figures  in  the 
right-hand  column: 

Capital  Stock   $2,500,000 

Bonded  Debt    800,000 

Notes  Payable 50,000 

Current  Liabilities  67,000 

Net  Revenue  for  the  Year 100,000 

Surplus   100,000 

$3,617,000 

The  directors  now  declare  a  stock  dividend  of  $125,000,  a 
cash  dividend  of  $40,000,  and  make  an  appropriation  to  Sinking 
Fund  Reserve  of  $50,000.  Give  entries.  Have  you  any  criticism 
to  pass  on  this  action?  If  the  bond  contract  requires  the  retention 
of  $50,000,  in  profits,  per  year,  have  the  bondholders  any  valid 
objection  to  this  procedure? 

18. 

(Form  B) 

A  bond  issue  of  the  Zenith  Manufacturing  Company  carries 
a  provision  in  the  bond  contract  requiring  an  appropriation  from 
income  to  Sinking  Fund  Reserve  each  year  of  $5,000.  Give  illus- 
trative entries. 

The  directors  of  the  Company  decide  of  their  own  volition  to 
set  aside  a  fund  of  liquid  assets  each  year  of  the  same  amount. 
Give  illustrative  entries. 

Which  action  protects  the  bondholder  most  fully?     Why? 


CORPORATE  PROPRIETORSHIP 


171 


19. 

(Form  B) 

The  X  Co.  issues  20-yr.  bonds  at  par,  $1,000,000.  The  sink- 
ing fund  provision  obtains  both  as  to  a  fund  and  income.  Each 
year  an  appropriation  of  $50,000  is  made.  At  the  end  of  20  years 
the  bonds  are  retired.  Give  balance  sheet  in  summary  form  at 
beginning  and  end  of  the  20-year  period;  and  give  the  journal 
entries  covering  one  year's  appropriations  and  the  retirement  of 
the  bonds. 

Miscellaneous   Surplus  Transactions  and  Appropriations 

20. 

(Form  B) 
In  general  ledger  of  the  Y  Co.  appear  (among  others)  the 
following  credit  balances  on  Dec.  31  for  each  of  the  years  named : 

1918  1919 

Reserve  for  Federal  Taxes $  50,000  $  40,000 

Reserve  for  Depreciation  160,000  180,000 

Reserve  for  Maintenance 5,ooo  2,000 

Reserve  for  Doubtful  Accounts 3,000  4,000 

Reserve  for  Sinking  Fund 200,000  220,000 

Reserve  for  Possible  Obsolescence 50,000  55,ooo 

Reserve  for  Extensions 300,000  300,000 

Reserve  for  Possible  Inventory  Loss 25,000         

Explain  carefully  the  probable  meaning  and  origin  of  each  of 
these  accounts  and  give  journal  entries  which  might  account  for 
the  changes  occuring  during  1919. 

21. 

The  right-hand  side  of  a  corporation  balance  sheet  appears 
as  follows: 

Capital   Stock    $1,000,000 

Bonds    500,000 

Reserve  for  Contingencies 10,000 


172  PROBLEMS  AND  EXERCISES 

Notes  and  Accounts  Payable. .  .  270,000 

Sinking  Fund  Reserve   125,000 

Surplus 1 10,000 

Reserv^e  for  Improvements....  60,000 

Dividends  Payable 20,000 

Accrued  Liabilities    26,000 

$2,121,000 

What  is  the  stockholder's  equity  as  shown  by  this  statement? 
Give  the  argument  for  and  against  considering  the  dividend  item 
as  part  of  proprietorship. 

22. 

(Form  B) 

The  officers  of  a  small  corporation  have  never  charged  their 
salaries  to  expense,  but  the  excess-profit  tax  induces  them  to 
adopt  this  procedure.  There  are  three  officers:  president,  secre- 
tary-treasurer, and  general  manager.  These  same  officers  also 
own  the  entire  capital  stock  of  the  corporation.  Salaries  are 
charged  to  expense  as  follows:  president,  $1,000;  secretary- 
treasurer,  $1,500;  general  manager,  $2,500.  None  of  these 
amounts  are  w^ithdrawn  in  cash,  however,  as  the  stockholders 
prefer  to  leave  the  money  in  the  business. 

Explain  a  method  of  recording  this  situation  in  the  accounts, 
giving  journal  entries.  Later,  stock  in  appropriate  amounts  is 
issued  to  cover  these  undrawn  salary  balances.    Journalize. 

23. 

(Form  B) 

(a)  An  officer  of  a  corporation  misappropriated  $15,000  in 
cash.  Three  years  later  he  returns  the  stolen  funds  with  simple 
interest  at  6%.    Journalize  both  occurrences. 

(b)  A  railroad  corporation  with  a  surplus  of  $140,000  is 
obliged  to  pay  back  taxes  amounting  to  $37,000.  Give  journal 
entries  on  the  corporation's  books. 


CORPORATE  PROPRIETORSHIP 


173 


24. 

(Form  B) 

The  operating  expenses  of  the  X  Co.  during  1919  totaled 
$3,420,000;  sales  amounted  to  $4,800,000;  miscellaneous  income 
equaled  $105,000.  In  view  of  this  information,  and  other  data 
laid  before  them,  the  directors  take  action  as  follows:  (i)  reserve 
for  accrued  interest  charges,  $300,000;  (2)  vote  a  bonus  to  the 
president  and  principal  stockholder  of  $25,000,  to  be  paid  out  of 
earnings,  as  a  compensation  for  exceptional  services  performed ; 
(3)  reserve  20%  of  net  proprietary  income  for  estimated  fed- 
eral taxes;  (4)  appropriate  $200,000  out  of  earnings  to  be  used 
for  plant  extensions;  (5)  declare  a  cash  dividend  on  the  prefer- 
red stock  of  $150,000  and  a  stock  dividend  on  the  common  stock 
of  $300,000;  (6)  appropriate  $50,000  to  provide  for  the  fact  that 
inadequate  depreciation  allowances  were  made  in  1918;  (7)  carry 
the  balance  of  earnings  to  undivided  profits  account. 

Present  journal  entries  giving  effect  to  the  above. 


Selber  Mfg.  Cc 

Assets 

Real  Estate 

$1,400,000 

New  Plant 

500,000 
2,200,000 

Equip,  and  Tools  .  .  . 

Pat'ns,  Dies,  Models. 

50,000 

Materials  and  Sup.. . 

400,000 

Pat'ts  and  Tradem'ks 

550,000 

Work  in  Progress  . .  . 

200,000 

Finished  Stock 

200,000 

Accts.  Receivable. .  . 

690,000 

Cash 

800,000 

Prepaid  Items 

20,000 

Bond  Sinking  Fund . 

300,000 

25- 

(Form  B) 

Dec.  31,  1919 

Liabilities  and  Capital 
Cap.  Stock — ^Com..  .$5,000,000 
Cap.  Stock — Pref . .  . .  250,000 
Mortgage  Bonds  ....  500,000 
Promissory  Notes  . .  •  50,000 
Div.  Payable — Com..  100,000 
Res.  for  Improve..  . 
Res.  for  Fed.  Taxes 
Fire  Reserves  .... 
Undivided  Profits  . . 
Merch.  Creditors .  . 
Accrued  Items  .... 
Advances  from  X  Co. 


500,000 
20,000 
30,000 
250,000 
580,000 
10,000 
20,000 


$7,310,000 


$7,310,000 


174  PROBLEMS  AND  EXERCISES 

(a)  What  is  the  equity  of  the  common  stockholders  accord- 
ing to  this  statement?  What  is  the  book  value  per  share  assum- 
ing par  to  be  $50?  Assuming  that  the  preferred  stock  was  orig- 
inally issued  at  par  and  the  common  stock  at  $40,  and  that  no 
shares  have  been  retired,  what  is  the  total  accumulated  profit  to 
date? 

(b)  Assume  that  on  Jan.  5,  1920,  the  Company  decided  to 
redeem  the  entire  issue  of  preferred  stock  at  $120  (par  being 
$100).  Exhibit  journal  entries  giving  efifect  to  this  procedure  in 
the  accounts,  and  state  concisely  the  significance  of  this  transac- 
tion from  the  standpoint  of  the  common  stockholders. 

(c)  Give  entries,  in  summary,  showing  the  origin  of  each 
of  the  following:  Undivided  Profits,  $250,000;  New  Plant, 
$500,000;  Reserve  for  Improvements,  $500,000;  Accrued  Items, 
$10,000;  Reserve  for  Federal  Taxes,  $20,000;  Fire  Reserves, 
$30,000;  Advances  from  the  X  Co.,  $20,000. 

(d)  The  "Bond  Sinking  Fund"  account,  you  discover,  rep- 
resents bonds  of  the  Selber  Mfg.  Co.  which  have  been  bought  on 
the  open  market  at  an  average  price  of  $80.  Give  the  journal  en- 
tries that  were  made  covering  this  purchase,  and  discuss. 

26. 

The  1921  advertising  budget  of  the  Winslow  Food  Pro- 
ducts Co.  calls  for  an  expenditure  of  $1,200,000.  This  amount, 
however,  is  likely  to  be  disbursed  very  unevenly  throughout  the 
year.  The  amount  of  advertising  cost  incurred  month  by  month 
will  likewise  vary  sharply.  The  books  are  closed  and  financial 
statements  prepared  at  the  close  of  each  month. 

Outline  a  system  of  entries  and  accounts  by  which  may  be 
shown  the  value  of  advertising  services  acquired  each  month,  the 
payments  on  advertising  account  per  period,  and  which  will  re- 
sult, however,  in  a  net  charge  to  revenue  each  month  of  $100,000 
for  advertising  expense.  Assuming  sales  run  approxiamtely  even 
month  by  month  would  such  a  scheme  of  accounting  be  justified? 


XIV 

THE  LIABILITIES 

Accounts  and  Notes  Payable 


Explain  the  distinction  between  funded  debt  and  Hoatutg 
indebtedness.  Why  is  it  important  to  maintain  this  classification 
in  the  accounts? 

2. 

"Any  single  account  payable  represents  a  debtor-creditor  re- 
lationship rather  than  an  equity  in  the  generally  accepted  sense. 
On  the  other  hand  the  total  of  the  accounts  payable  item  on  the 
balance  sheet  may  represent  a  considerable  part  of  a  company's 
capitalization  and,  therefore,  constitute  a  significant  equity." 

Explain. 

3. 
(Form  B) 

The  X  Co.  buys  goods  on  account  during  its  first  accounting 
period  with  a  gross  price  of  $500,000.  Possible  discounts  on 
these  purchases  amount  to  $10,000.  The  X  Co.  pays  creditors 
during  the  period  $400,000,  thereby  taking  advantage  of  discounts 
offered  to  the  amount  of  $8,000.  No  discounts  are  allowed  to 
lapse.  The  inventory  of  merchandise  at  the  end  of  the  period, 
at  gross  price,  is  $75,000.  Discounts  taken  and  to  be  taken 
applicable  thereto  total  $1,500. 

Giving  journal  entries  and  full  explanations  outline  a  method 
by  which  the  discounts  yet  to  be  taken  may  be  recognized  in  the 
determination  of  a  rational  merchandise  cost  of  sales  figure  and  in 
the  setting  of  a  correct  liability  in  the  balance  sheet.  Show  the 
way  in  which,  in  the  operating  statement,  the  merchandise  cost 
of  sales  figure  would  be  exhibited. 


176  PROBLEMS  AND  BXBRCISES 


Explain  the  commercial  distinction  between  promissory  notes 
and  accounts  payable.     Is  there  a  legal  distinction? 

Name  several  types  of  promissory  evidences  of  indebtedness 
v^hich  are  commonly  recorded  in  the  accounts  as  notes  payable. 

Accrued^  Deferred  and  Contingent  Liabilities 

5. 

What  is  meant  by  an  accrued  liability?  Give  an  illustration, 
showing  the  journal  entries  which  are  made  at  the  time  such  a 
liability  is  recognized  in  the  accounts. 

6. 

"Wages  payable  are  not  an  accrued  liability.  Such  items 
are  in  essentially  the  same  class  as  the  merchandise  accounts  pay- 
able. The  business  enterprise  commonly  buys  labor  services  on 
account  just  as  it  buys  merchandise.  Ideally  charges  should  be 
made  daily  to  a  Labor  Services  account  and  concurrent  credits 
should  be  entered  in  the  Payroll  Payable  account.  (Entries 
should  also  be  made  in  the  account — on  a  card,  ticket,  book  or 
other  device — of  each  individual  laborer,  just  as  credit  is  given 
the  individual  merchandise  creditor.)  When  payments  are  made 
Payroll  Payable  (and  the  appropriate  individual  accounts)  should 
be  charged.  The  balance  of  the  Payroll  Payable  account  at  any 
time  represents  a  definite  equity  in  the  business." 

Discuss. 

7- 

Define  "deferred"  liability  and  give  several  examples.  Show 
that  the  designation  is  really  a  misnomer,  since  all  liabilities  are 
deferred. 

8. 

State  what  is  meant  by  a  contingent  liability  and  show  how 
the  same  may  be  treated  in  the  accounts  and  in  the  financial  re- 
ports. 


THE  LIABILITIES 


Mortgages  and  Bonds 


177 


What  is  the  essential  difference  between  the  position  of  a 
mortgageholder  and  that  of  a  bondholder  in  a  business  enterprise? 

10. 

"The  bondholder  must  be  thought  of  as  an  investor  and  not 
merely  as  a  creditor.  Particular  issues  are  retired  from  time  to 
time,  it  is  true,  but  bonds  and  similar  securities  represent  a  large 
part  of  the  essentially  permanent  capitalization  of  many  corpora- 
tions. Taking  American  railways  as  a  whole,  bond  equities  are 
as  large  in  amount  as  the  capital  stock  issued." 

Argue  in  support  of  this  position. 

II. 

Look  up  the  balance  sheet  of  some  large  corporation  and 
note  the  dift'erent  classes  of  bonds  outstanding.  (Moody's  Man- 
ual of  Corporation  Securities  furnishes  an  abundance  of  mate- 
rial for  this  purpose). 

12. 

Scrutinize  the  liability  side  of  the  railway  balance  sheet 
given  in  Appendix  C  of  the  textbook. 

13. 

Why  are  income  bonds  usually  a  rather  unsafe  investment? 
Why  is  sound  accounting  of  particular  importance  to  the  income 
bondholder? 

14. 

On  the  basis  of  your  studies  in  Part  Two  of  the  text,  draw 
up  a  schedule  of  equities  which  might  represent  the  equity  side 
of  a  corporation  balance  sheet  assuming  that  the  corporation  has 
used  each  important  device  for  obtaining  capital.  Arrange  the 
list  in  the  probable  order  of  priority  to  income  and  assets. 


XV 

GENERAL  ANALYSIS  OF  THE  INTEREST  PROBLEM 

The  Interest  Phenomenon 

Explain  what  is  meant  by  the  terms  explicit  interest  and  im- 
plicit interest.    Give  illustrations. 

2. 

Why  are  loans  generally  classified  into  long-term,  and  short- 
term  obligations?  What  is  the  basis  for  the  distinction?  Give 
illustrations  of  each  type. 

3. 

Mr.  Smith  owns  a  leasehold  which  yields  a  net  income  of 
$10,000  per  year.  The  lease  expires  in  ten  years.  The  X  Co. 
offers  Mr.  Smith  $73,600.87  for  the  leasehold. 

(a)  Show  how  interest  is  involved  in  this  transaction. 

(b)  If  interest  were  not  involved  what  would  the  X  Co.'s 
offer  have  been  ? 

(c)  After  making  this  purchase,  how  would  the  X  Co.  sub- 
divide in  its  books  each  annual  installment  of  $10,000. 

4- 

An  advertisement  of  a  well-known  make  of  automobile 
appearing  in  a  magazine  some  time  ago  had  in  it  a  statement  that 
ran  somewhat  as  follows: 

"We  have  no  bonds  outstanding  on  which  interest  must  be 
paid.  Most  of  our  competitors  do  have  bonds  issued  on  which  in- 
terest must  be  paid  regularly.  Our  costs  are  therefore  lower  and 
we  can  sell  at  a  lower  price." 

Is  this  statement  reasonable?    Explain  carefully. 


ANALYSIS  OF  INTEREST  PROBLEM  179 


A  manufacturing  concern  employs  10  men  on  a  certain  oper- 
ation, paying  them  each  $6  per  day.  It  is  necessary  for  the  firm  to 
keep  a  fund  of  approximately  $600,  continuously,  to  meet  its 
payroll  for  these  men.  An  automatic  machine  is  invented  which 
will  do  the  work  of  these  10  men  and  require  only  one  "three- 
dollar"  man  to  tend  it.  This  machine  costs  $10,000,  and  there- 
fore requires  a  capital  outlay  of  that  amount. 

Show  that  the  manager  of  this  plant  must  recognize  interest 
in  determining  whether  or  not  he  will  buy  the  machine.  Explain 
fully. 

CoMMERCiAi,  Interb;st 

6. 

Give  an  argument  in  support  of  the  current  practice  of  con- 
sidering commercial  interest  as  an  expense  rather  than  as  a  de- 
duction from  net  revenue. 

7- 

Explain  and  illustrate  the  difference  between  the  rate  of  in- 
terest and  the  rate  of  discount. 

8. 

Name  at  least  four  types  of  commercial  paper  which  might 
be  included  in  the  general  category,  notes  payable.  Illustrate  each 
one  by  drawing  up  an  illustration  in  proper  legal  form.^ 

9- 

One  of  the  most  important  considerations  in  the  preparation 
of  accounting  statements  is  the  separation  of  unlike  items  into  dis- 
tinct classes.  The  amount  of  notes  payable,  for  example,  should 
never  be  offset  by  notes  receivable,  either  in  the  accounts  or  in  the 
balance  sheet.     It  is  maintained  in  this  chapter  of  the  textbook, 


^  The  student  should  study  these  forms  as  presented  in  some  recent 
book. 


,8o  PROBLEMS  AND  EXERCISES 

however,  that  interest  on  notes  payable  and  interest  on  notes  re- 
ceivable, can,  under  certain  circumstances,  be  properly  placed  in 
the  opposite  columns  of  a  single  account  and  can  be  combined  in 
one  figure  for  income  sheet  purposes. 
Can  you  justify  this  position? 

lO. 

(Form  B) 

On  Dec.  6,  1919,  the  X  Co.  receives  a  $1,000,  6%  note 
signed  by  Y,  a  customer,  to  apply  on  Y's  account  for  the  amount 
of  the  face.  The  note  is  dated  Dec.  i,  1919,  and  runs  for  one 
year.  On  Sept.  i,  1920,  the  X  Co.  discounts  this  note  and  inter- 
est at  the  Z  Bank  at  8%. 

Prepare  journal  entries  covering  this  situation  on  the  X  Co.'s 
books,  assuming  the  Company  closes  its  books  on  Dec.  31  and 
June  30. 

LoxG  Term  Securities 

II. 

"Interest  on  long-term  securities  should  always  be  treated  as 
a  net  revenue  item,  although  commercial  interest  may  reasonably 
be  considered  as  a  gross  revenue  charge  or  credit." 

Argue  in  support  of  this  view. 

12. 

"The  order  in  which  the  interest  items  appear  in  the  net 
revenue  statement  is  governed  by  contract.*' 

What  parties  are  concerned  in  the  contracts  referred  to  and 
how  do  these  contracts  influence  the  order  of  the  interest  items? 

13- 

(Form  B) 
The  A  Co.  issued  $100,000  (par  value)  of  6%,  lo-year  bonds, 
interest  payable  semiannually,  on  June  i,  1921,  for  $107,795.    This 
price  is  sufficient  to  yield  the  investor  a  rate  of  5%. 


ANALYSIS  OF  INTEREST  PROBLEM  i8i 

(a)  Give  the  entries  on  the  A  Co.'s  books  to  record,  in  sum- 
mary, the  issue  of  these  bonds. 

(b)  Give  the  entries  recording  the  payment  of  the  semian- 
nual interest  on  Dec.  i,  192 1,  and  June  i,  1922. 

14. 

(Form  B) 

The  B  Co.  issued  $100,000  (par  value)  of  6%,  lo-year, 
bonds,  interest  payable  semiannually,  on  June  i,  192 1,  for  $92,- 
894.     This  price  yields  the  investor  7%. 

Answer  the  same  questions  as  v^ere  asked  in  Problem  13. 

15- 

Prepare  tables  showing  the  amortization  of  premium  and  the 
accumulation  of  discount  for  the  bonds  described  in  Problems 
13  and  14,  respectively. 

Interest  in  Vai^uations 

16. 

(Form  B) 
Give  the  entries  on  the  books  of  the  investor  in  the  bonds 
of  the  A  Co.  (Problem  13)  and  of  the  B  Co.  (Problem  14)  on  the 
date  of  purchase  and  at  the  first  and  second  interest  payment 
dates,  assuming  no  changes  in  the  market  rate  of  interest.  (As- 
sume a  single  purchaser  in  each  case.) 

17- 

The  X  Co.  is  considering  the  purchase  of  all  the  assets  and 
business  connections  of  the  Y  Co.  The  Y  Co.  shows  that  it  has 
an  advantage  over  all  competitors  that  brings  in  an  annual  in- 
come of  $20,000.  In  the  sale  of  its  business  the  Y  Co.  asks 
$229,400  over  and  above  the  price  for  all  other  assets,  to  cover 
this  advantage,  or  goodwill. 

How  was  this  valuation  obtained?    Discuss  fully. 


XVI 

INTEREST  CALCULATIONS 
The  Accumulation  of  Principal 


Explain  the  distinction  between  simple  and  compound  inter- 
est. Show  in  tabular  form  the  amounts  to  which  $1,500  would 
accumulate  in  90  days,  6  months,  and  3  years,  respectively,  first 
using  a  6%  simple  interest  rate  and,  second,  a  6%  rate,  interest 
convertible  quarterly. 

2. 

Mortgage  rates  calling  for  the  payment  of  7%  payable  semi- 
annually, bear  what  effective  rate  of  interest? 

3- 

If  a  firm  desires  to  issue  some  notes  bearing  an  effective  rate 
of  7%  but  wishes  to  pay  the  interest  in  semiannual  installments, 
what  nominal  rate  must  be  used? 

The  Present  Value  of  a  Future  Sum 

4. 

The  legal  rate  of  interest  is  8%  in  some  states.  If  the  banks 
in  these  sections  use  an  8%  rate  of  discount  on  commercial  paper, 
what  rate  of  interest  does  the  borrower  really  pay  ? 

5. 

In  case  a  bank  wishes  to  discount  a  60-day,  $1,000  note  at  a 
rate  sufiicient  to  yield  an  8%  rate  of  interest,  what  rate  of  dis- 
count should  be  used  ? 


INTEREST  CALCULATIONS  183 

6. 

The  X  Co.  offers  as  an  investment  its  own  promise  to  pay 
$100,000  due  5  years  from  date. 

(a)  Prepare  a  bid  on  this  security  with  interest  at  the  rate 
of  6%,  convertible  annually. 

(b)  Prepare  another  bid  at  8%,  convertible  semiannually. 

The  Accumulation  of  an  Annuity 


If  the  amount  of  $200  were  placed  in  a  savings  bank  every  6 
months,  and  the  bank  allowed  4%  interest  convertible  semiannu- 
ally, how  much  would  be  on  deposit  at  the  end  of  8  years  ?  At  the 
end  of  10  years? 

8. 

Suppose  that  $400  were  deposited  in  the  bank  at  the  end  of 
each  year  and  the  bank  allowed  4%,  convertible  semiannually. 

How  much  would  be  on  deposit  at  the  end  of  8  years?  At 
the  end  of  10  years. 

The  sum  of  $100  is  placed  in  a  bank  at  the  end  of  each  3 
months'  period.  The  bank  computes  interest  at  the  rate  of  4%, 
convertible  semiannually. 

'What  will  be  the  amount  on  deposit  at  the  end  of  8  years? 
At  the  end  of  10  years? 

10. 

The  sum  of  $50  is  placed  with  a  building  and  loan  associa- 
tion at  the  end  of  each  month.  The  association  computes  inter- 
est at  the  rate  of  6%,  convertible  semiannually. 

What  will  be  the  amount  in  the  fund  at  the  end  of  10  years? 


1 84  PROBLEMS  AND  BXERCISBS 

Present  Worth  of  an  Annuity 

zi. 

The  X  Co.  offers  for  investment  a  5-year  annuity  of  $4,000 
per  year,  payable  in  equal  semiannual  installments.  Prepare  bids 
for  this  annuity  at  the  following  rates  of  interest:  (a)  6%,  con- 
vertible annually;  (b)  6%,  convertible  semiannually;  (c)  8%, 
convertible  semiannually;  (d)  8%,  convertible  quarterly. 

12. 

How  much  could  you  afford  to  pay  for  a  lo-year  annuity  of 
$3,600,  payable  in  equal  monthly  installments,  if  you  considered 
8%  convertible  semiannually  as  a  fair  rate  of  interest? 

13- 

The  X  Railroad  Co.  has  paid  a  6%  dividend  on  its  stock  for 
several  years.  There  is  every  indication  that  it  will  pay  this  rate 
continuously  in  the  future.  Assuming  that  this  sort  of  investment 
should  yield  the  investor  8%,  what  would  be  the  value  of  the 
stock,  the  par  value  being  $100? 

14. 

Select  a  stock  issue  from  the  financial  page  of  a  newspaper. 
Find  the  current  dividend  yield  and  value  of  the  stock  on  a  7%, 
8%  and  9%  basis,  respectively.  Compare  each  of  your  valuations 
with  the  quotation  given  in  the  paper. 

Sinking  Fund  Contributions 

15- 

The  Smith  Auto  Wheel  Co.  issued  $100,000,  par,  of  20-year 
bonds.  There  is  a  sinking  fund  clause  in  the  bond  contract  which 
requires  the  Company  to  place  in  the  hands  of  a  trustee  each  year 
an  amount  which  will  accumulate  to  the  par  of  the  bonds  at  ma- 
turity. 


INTEREST  CALCULATIONS  185 

(a)  If  the  rate  which  can  be  reaHzed  by  the  trustee  is  4/^%> 
convertible  annually,  what  should  the  annual  contribution  be  ? 

(b)  If  the  rate  of  interest  obtained  by  the  trustee  is  5%, 
convertible  semiannually,  what  would  the  annual  contribution  be  ? 

The  Annuity  Which  a  Principal  Will  Purchase 

16. 

Mrs.  George  Jones  has  just  received  the  principal  of  a  life 
insurance  policy  amounting  to  $10,000.  She  desires  to  invest  the 
funds  in  an  annuity  which  will  run  for  10  years.  Assuming  that 
the  market  rate  of  interest  for  securities  of  the  type  she  is  willing 
to  accept  were  5%,  convertible  semiannually,  how  large  an  an- 
nuity could  be  purchased,  assuming  the  annuity  payments  to  be 
made  semiannually?  Suppose  the  interest  rate  involved  were  8% 
convertible  semiannually,  what  would  be  the  amount  of  the  semi- 
annual payment  ? 

The  Apportionment  of  Annuity  Payments 

17- 

Prepare  a  table  showing  the  distribution  of  the  annuity  pay- 
ments between  principal  and  interest  for  the  annuity  mentioned  in 
Problem  16  for  each  of  the  rates  of  interest  given. 

18. 

(a)  What  would  be  the  purchase  price  of  a  leasehold  that 
would  produce  an  annual  net  revenue  of  $4,000,  for  18  years,  at 
an  interest  rate  of  6%,  convertible  annually? 

(b)  Prepare  a  table  showing  the  distribution  of  each  pay- 
ment mentioned  in  (a)  above,  between  principal  and  interest. 


1 86  PROBLEMS  AND  EXERCISES 

The  Vai^uation  of  Bonds 

19. 

Prepare  a  bid  for  an  issue  of  $100,000  of  the  X  Co.'s  5-year, 
4%  bonds,  interest  payable  semiannually,  on  a  6%  and  8%  basis, 
respectively,  interest  convertible  semiannually.  Compare  your 
results  with  the  sums  of  the  results  obtained  in  Problems  6  and  1 1 
for  the  same  rates  of  interest. 

20. 

Select  a  bond  advertisement  from  the  financial  page  of  a  cur- 
rent newspaper  and  prepare  a  bid  based  on  what  you  consider  to 
be  the  market  rate  of  interest.  Compare  your  bid  with  the  price 
quoted  in  the  advertisement. 

21. 

The  Johnson  Wagon  Company  has  issued  $1,000,000  (par) 
of  6%,  5-year  bonds,  interest  payable  semiannually.  The  bonds 
were  issued  on  a  7%  basis,  interest  convertible  semiannually.  Pre- 
pare a  table  showing  the  accumulation  of  discount. 

22. 

Suppose  that  the  bonds  mentioned  in  the  preceding  problem 
had  carried  a  7%  rate  and  were  issued  at  a  price  to  yield  6%. 
Prepare  a  table  showing  the  amortization  of  premium. 

23. 

From  an  advertisement  in  the  Cincinnati  Enquirer,  for  Sun- 
day, June   19,   192 1 :     "$1,250,000,   Cincinnati,  Ohio,  5%   Gold 

Bonds.    Dated  July  i,  1920.    Due  July  i,  1965.    Price  of , 

yielding  approximately  5.40%." 

Fill  in  the  price  quotation. 


INTEREST  CALCULATIONS  187 

Determining  the  Interest  Rate 

24. 

The  price  paid  for  an  issue  of  $100,000,  par,  of  20-year  4% 
bonds,  interest  payable  semiannually,  was  $93,411.61.  What  rate 
of  interest  was  used  in  this  valuation? 

25. 

Suppose  the  price  of  the  bonds  mentioned  in  the  preceding 
problem  had  been  $107,148.53.  What  interest  rate  would  have 
been  involved  in  the  valuation? 


XVII 
INTEREST  TRAXSACTIOXS— EQUITY  ACCOUXTS 

Long-Term  Xox-Ixterest  Bearing  Xotes 

I. 

Under  what  conditions  would  it  be  advisable  for  an  enter- 
prise to  issue  a  long-term,  non-interest  bearing  note?  To  what 
type  of  investor  would  this  form  of  security  appeal  ? 

2. 

The  ^Mercantile  Trade  Co.  borrows  a  sum  of  money  on  a 
$15,000  (face)  5-year,  non-interest  bearing  note.  The  loan  is 
negotiated  on  a  7%  basis,  interest  convertible  semiannually. 

(a)  Give  the  journal  entries  at  the  date  the  note  is  issued. 

(b)  Prepare  a  table  showing  the  accumulation  of  interest 
by  half-year  periods  throughout  the  5  years. 

3. 

If  the  note  mentioned  in  Problem  2  had  been  dated  June  30 
but  was  issued  Sept.  30,  what  would  the  entries  have  been  on  the 
latter  date? 

Annuities 

4- 

(Form  B) 

The  \\'illiamston  ^Mining  Co.  agrees  to  pay  S75.000  per  year 
for  10  years,  payable  in  equal  semiannual  installments,  in  ex- 
chang-e  for  ore  rights  in  a  tract  of  land.     What  entries  should  be 


INTEREST  TRANSACTIONS  189 

made  to  recognize  the  acquisition  of  the  ore  rights,  assuming  an 
8%  rate  of  interest  convertible  semiannually?  What  entries 
should  be  made  covering  the  first  two  installments? 

5. 

(Form  B) 

Suppose  that  the  annuity  installments  (Problem  4)  are  paid 
on  Aug,  I  and  Feb.  i,  but  that  the  Company's  books  are  closed  on 
Dec.  31.  What  entries  should  be  made  on  the  first  closing  date? 
(Assume  that  the  annuity  was  issued  on  Feb.  i  and  that  the  first 
installment  was  paid  on  Aug.  i.) 

Bonds  Issued  at  Par 

6. 

Explain  the  significance  in  the  accounting  records  of  the  par 
value  of  bonds. 

7. 

(Form  B) 

The  Halter  Co.  issued  at  par  $100,000  of  6%,  10-year  bonds, 
interest  payable  semiannually.  Give  the  entries  recording  the 
issue,  and  the  first  two  interest  payments. 

8. 

(Form  B) 

Assume  that  the  bonds  mentioned  in  Problem  7  were  dated 
June  I  and  that  the  interest  payments  are  made  on  Dec.  i  and  June 
I.  Suppose  further  that  a  block  of  $25,000  was  sold  on  June  i ; 
$25,000  on  July  I ;  $25,000  on  Aug.  i ;  and  $25,000  on  Sept.  i. 

Give  entries  covering  the  sale  of  each  block,  the  payment  of 
bond  interest  on  Dec.  i,  and  the  closing  entries  on  Dec.  31. 


I90  PROBLEMS  AND  EXERCISES 

Bonds  Issued  at  a  Discount 

9. 

(Form  B) 

A  certain  corporation  issued  $100,000,  par.  of  4%,  20-year 
bonds  on  a  6%  basis,  interest  payable  and  convertible  semian- 
nually. 

(a)  Give  the  entries  on  the  date  of  issue. 

(b)  Give  the  entries  on  the  corporation's  books  at  the  first 
interest  payment  date. 

10. 
(Form  B) 

Suppose  that  the  bonds  described  in  Problem  9  were  dated 
April  I,  1921,  and  that  the  sales  were  made  as  follows:  $15,000 
on  April  i ;  $30,000  May  i ;  $50,000  June  i ;  and  the  balance  on 
July  I. 

Give  the  journal  entries  covering  the  sale  of  each  block  and 
the  payment  of  the  bond  interest  on  Oct.  i,  192 1.  Give  the  en- 
tries on  Dec.  31,  1921,  when  the  books  are  closed. 

II. 

(Form  B) 

A  construction  company  is  asked  to  furnish  bids  for  the  con- 
struction of  a  factory  building  for  the  A  Co.  According  to  the 
bids  received  the  construction  company  will  build  the  structure 
for  $500,000  cash,  or  for  $515,000,  par,  in  the  A  Co.'s  5%  bonds. 

Give  the  journal  entries  on  the  A  Co.'s  books  assuming  re- 
spectively: (a)  that  the  cash  bid  is  accepted;  (b)  that  the  4% 
bond  bid  is  accepted. 

12. 

The  A  Co.  (Problem  11)  accepted  the  4%  bond  bid  and  the 
president  of  the  company  requests  the  accountant  to  make  these 
entries : 


INTEREST  TRANSACTIONS  191 

Building $515,000 

Bonds — Par  $515,000 

He  argues  that  the  additional  $15,000  over  the  cash  bid  is  a 
cost  of  obtaining  the  necessary  capital  to  build  the  factory  and 
hence  is  a  property  charge  just  the  same  as  the  salary  of  the 
draftsman  who  draws  the  necessary  plans  is  a  property  charge. 

Give  your  opinion  of  the  president's  argument. 

13. 

(a)  A  corporation  issued  $500,000,  par,  of  5%,  lo-year 
bonds,  and  received  $450,000  cash.  The  bookkeeper  made  the 
following  entries : 

Cash   $450,000 

Bonds  $450,000 

Is  there  anything  fundamently  wrong  with  these  entries? 
Explain  carefully. 

(b)  Suppose  that  the  bookkeeper — (a)  above — made  the 
following  entries  at  each  semiannual  interest  payment  date : 

Interest $12,500 

Cash    $12,500 

Would  there  be  an  error  involved  in  these  entries?  Ex- 
plain fully.  If  this  method  of  accounting  is  followed  through- 
out the  lo-year  period  what  entries  would  have  to  be  made  at  the 
date  the  bonds  mature  and  are  paid  ? 

14. 

(a)  It  is  the  practice  of  some  corporations  to  charge  discount 
on  bonds  to  Surplus  account  at  the  date  of  issue.  Discuss.  Show 
that  if  the  discount  were  of  significant  amount  the  rights  of  par- 
ticular investors  and  classes  of  investors  might  be  disturbed  by 
such  a  practice. 

(b)  ^^'ould  you  object  to  the  practice  of  charging  discount 
on  capital  stock  issued  directly  to  undivided  profits?  Explain 
the  difiference  between  discount  on  bonds  and  discount  on  stocks. 


192 


PROBLEMS  AND  EXERCISES 


15. 

(Form  B) 

The  Crown  Smelting  Co.  has  outstanding  an  issue  of  mort- 
gage bonds  due  Jan.  i,  1930.  The  par  of  the  issue  is  $100,000; 
and  it  carries  a  6%  rate,  "interest"  payable  semiannually.  On 
Jan.  I,  1920,  the  Discount  on  Mortgage  Bonds  account  on  the 
Company's  books  shows  a  balance  of  $i3o9i-3i-  Assuming  that 
the  true  rate  of  interest  in  this  case  is  8%,  convertible  semiannu- 
ally, and  that  the  Company  closes  its  books  on  June  30  and  Dec. 
31  (which  are  also  the  "interest"  payment  dates)  prepare  the 
journal  entries,  with  respect  to  this  bond  issue,  which  should  be 
made  on  these  dates. 

In  1921  the  Company's  accountant  decides  to  close  the  books 
every  quarter.  Give  the  entries,  with  respect  to  the  bond  issue, 
on  the  first  two  closing  dates  of  the  year. 

16. 

(Form  B) 

An  8%  debenture,  par  $1,000,  is  sold  Dec.  31,  191 7,  at  a 
price  to  yield  lO^c,  convertible  semiannually.  The  interest  is  pay- 
able semiannually.  The  date  of  maturity  is  Dec.  31,  1919.  What 
entries  should  be  made  on  the  books  of  the  issuing  company  to 
record : 

(a)  The  issue  of  the  bond. 

(b)  The  four  "bond  interest"  payments. 

(c)  The  payment  of  the  bond. 


Explain  briefly  the  importance  of  the  analysis  recognized  by 
your  entries  (preceding  problem)  upon  the  integrity  of  the  in- 
come sheet  and  balance  sheet  of  the  corporation.  Show  that  the 
par  of  this  bond  was  not  the  effective  liability  at  the  date  of  issue. 


INTEREST  TRANSACTIONS  193 

18. 

(Form  B) 

On  Jan.  i,  1920,  the  W  Co.  issued  a  block  (par  $100,000)  of 
5%  debenture  bonds,  dated  as  of  the  date  of  issue.  Subscribers 
pay  par  but  receive  as  a  bonus  1,000  shares  (par  100)  of  the 
Company's  common  stock.  This  stock  has  an  estabhshed  market 
price  of  $10  per  share. 

(a)  Give  journal  entries  on  the  W  Co's  books. 

(b)  Assuming  bond  "interest"  is  paid  semiannually,  that  the 
effective  rate  involved  in  the  transaction  is  8%,  and  that  the  Com- 
pany closes  its  books  only  on  the  last  day  of  the  year,  give  the 
journal  entries  which  should  be  made  on  the  corporate  books  on 
the  first  two  "interest"  payment  dates. 

(c)  Do  the  same  assuming  the  corporation  closes  its  books 
each  year  on  Sept.  30. 

Bonds  Issued  at  a  Premium 

ig- 

(Form  B) 

A  corporation  issues  a  block  of  20-year,  7%  bonds  at  a 
market  rate  of  6%,  realizing  $111,500.  Assuming  that  interest  is 
paid  semiannually  and  that  the  corporation  closes  its  books  only 
on  interest  payment  dates,  give  the  journal  entries  on  the  corpor- 
ation's books  at  date  of  issue,  the  first  two  interest  payment  dates, 
and  at  maturity. 

Suppose  the  books  of  this  company  were  closed  3  months 
after  the  issue  of  the  bonds  and  again  3  months  later.  Give  the 
journal  entries  with  respect  to  these  bonds  and  the  interest  there- 
on, under  this  assumption,  at  these  two  closing  dates. 

State  precisely  the  significance  of  this  bond  premium,  and 
show  the  effect  of  a  neglect  to  amortize  it. 


19^  PROBLEMS  AND  BXBRCiSIiS 


20. 


(Form  B) 

(a)  The  Worcester  Arms  Co.  offers  the  X  Investment  Co. 
a  lo-year  note,  face  or  par  $500,000,  carrying  an  annuity  of  8%, 
payable  semiannually.  The  notes  are  dated  Jan.  i,  1920.  The  in- 
vestment company  subscribes  at  a  price  which  will  yield  7%  in- 
terest, convertible  semiannually. 

Give  journal  entries  on  the  books  of  the  Worcester  Arms  Co. 
at  date  of  issue,  at  the  first  two  "interest"  payment  dates,  and  at 
maturity.  Explain  the  effects  of  your  entries  upon  the  income 
sheet  and  balance  sheet  of  the  Worcester  Arms  Co. 

(b)  Suppose  that  the  Worcester  Arms  Co.  closes  its  books 
and  prepares  statements  on  the  last  day  of  each  month.  Suppose 
further  that  the  subscription  of  the  X  Investment  Co.  is  not  re- 
ceived until  Jan.  15,  and  that  the  subscription  is  not  paid  until 
Jan.  31. 

Give  the  entries,  with  respect  to  this  note  ((a)  above)  at  the 
date  of  issue,  on  May  31,  on  June  30,  and  on  July  i,  on  the  books 
of  the  Worcester  Arms  Co. 


2  Id 


"The  failure  to  amortize  a  bond  premium  throughout  the  life 
of  the  security,  or  the  crediting  of  such  premium  directly  to  Sur- 
plus account  at  time  of  issue,  are  improper  accounting  practices, 
less  serious  from  the  practical  standpoint,  however,  than  the  cor- 
responding mistakes  in  connection  with  bond  discounts." 

Explain  and  support  this  statement. 


22. 


A  bond  issue,  rate  7%,  par  $100,000,  was  emitted  at  the  be- 
ginning of  1920,  at  a  price  of  $105,000.  This  gave  a  yield  of  ap- 
proximately 6%.  At  the  first  interest  payment  date  the  issuing 
company's  accountant,  following  the  practice  of  many  account- 


INTEREST  TRANSACTIONS  I95 

ants  and  the  regulations  of  the  Bureau  of  Internal  Revenue,  made 
entries  as  follows : 

Interest    $3-500 

Cash    $3,500 

and, 

Unamortized  Bond   Premium      350 

Amortization  of  Prem...  350. 

He  justifies  this  procedure  on  the  basis  of  the  view  that  bond 
premium  is  really  a  deferred  revenue  item,  which  is  realized 
gradually  during  the  life  of  the  security.     The  credit  to  "Amor- 
tization of  Premium,"  accordingly,  is  an  income  item. 
Discuss  critically. 

23. 

"When  a  closing  date  comes  between  "interest"  payment 
dates,  it  is  important  that  the  true  charge  to  interest  be  accrued 
but  it  is  not  necessary  to  accrue  the  premium  amortization," 

Explain  carefully. 


The  Refunding  of  Securities  and  Miscellaneous 

24. 

Show  that  changes  in  the  market  rate  of  interest  need  not 
be  recognized  on  the  books  of  the  issuing  company  once  the  en- 
tire issue  has  been  emitted.  Show  that  while  the  issuer,  in  prin- 
ciple, can  "buy"  back  outstanding  bonds  on  the  open  market,  there 
is  little  likelihood  that  a  corporation  can,  as  a  practical  matter, 
undertake  any  such  operation  on  a  large  scale.  (In  answering 
this  question  look  up  the  current  quotations  of  standard  railway 
bonds  in  some  financial  paper  and  note  the  very  marked  discounts 
at  which  some  low-interest  issues  are  selling.  Then  ask  yourself 
this  question :  Why  does  not  the  issuing  company  take  advantage 
of  such  an  opportunity  to  reduce  its  indebtedness,  instead  of  wait- 
ing until  maturity,  at  which  time  par  must  be  paid?) 


ig6  PROBLEMS  AND  EXERCISES 

25. 

Study  carefully  the  following  statements,  and  make  com- 
ments as  called  for: 

(a)  The  actual  flotation  of  a  large  issue  of  bonds  or  other 
contractual  securities  is  not  a  simple  matter  like  selling  merchan- 
dise across  the  counter.  In  the  first  place  the  legal  arrangements, 
such  as  the  preparation  of  the  underlying  mortgages  or  other 
instruments,  must  be  completed.  Amounts,  rates,  prices,  etc., 
must  be  decided  upon.  If  the  issue  is  placed  through  general  sub- 
scriptions, these  subscriptions  must  be  secured.  Payments  by  sub- 
scribers, usually  in  a  series  of  installments,  must  be  called  in  and 
accounted  for.  Finally  the  security  itself  must  be  drawn  up  and 
issued  to  the  various  investors.  This  w^hole  process  may  consume 
months  of  time  and  require  a  great  deal  of  routine  bookkeeping. 
The  flotation  of  the  "Liberty"  loans,  furnishes  an  illustration,  on  a 
tremendous  scale,  of  these  complexities.  The  student  should  re- 
member that  the  cases  with  which  he  has  been  dealing  are  much 
simplified  and  summarized,  for  the  most  part,  as  compared  with 
the  actual  situation. 

(b)  In  the  emission  of  bonds  an  "asked"  price,  which  it  is 
believed  market  conditions  will  warrant,  is  frequently  made  up  in 
advance.  The  advertising  circulars  give  this  price,  prepared  by 
the  issuing  company  or  its  brokers,  and  the  true  "yield"  to  the 
investor.  But  of  course  it  may  be  necessary  to  revise  this  price. 
A  sale  cannot  always  be  forced  at  the  initial  figure.  In  the  long 
run  it  is  actually  true  that  demand  and  supply  settle  bond  prices 
in  much  the  same  manner  that  commodity  prices  are  determined. 
Thus  a  particular  issue  may  be  "sold"  in  blocks  at  a  series  of 
prices.  In  such  a  case,  evidently,  there  are  several  "true"  inter- 
est rates.  It  would  be  impractical  to  attempt  to  follow  each  block 
separately  in  the  accounts,  however.  As  soon  as  the  entire  issue 
is  out  an  average  true  rate  should  be  determined  and  used  there- 
after in  working  out  accumulation  and  amortization. 

(c)  The  student  should  keep  in  mind  the  fact  that  the  actual 
date  of  the  bond,  in  practice,  may  not  coincide  with  the  begin- 


INTEREST  TRAXSACTIOXS 


197 


ning  of  an  accounting  period,  nor  with  the  date  that  the  cash  or 
other  property  is  received  therefor.  Further,  the  interest  period 
is  quite  Hkely  not  to  coincide  with  the  accounting  period. 

(d)  In  some  cases  an  entire  issue  is  virtuahy  "sold"  to  a 
brokerage  or  investment  banking  house  (a  security-jobber).  If 
title  passes,  in  such  a  case,  the  transaction  is  complete  as  far  as 
the  issuing  company  is  concerned,  the  price  at  which  the  ultimate 
investor  secures  his  bond  being  of  no  more  consequence  in  the 
issuer's  accounts  than  the  price  the  consumer  of  canned  soup 
finally  pays  is  in  the  books  of  the  manufacturer  thereof.  In  other 
cases  the  broker  undertakes  to  place  the  issue  at  an  agreed  com- 
mission. In  still  other  instances  the  issuing  corporation  endeavors 
to  reach  the  actual  investor  through  its  own  salesmen.  In  these 
last  two  situations  we  have  a  distinctive  accounting  problem. 

Suppose,  to  make  the  problem  concrete,  the  X  Co.  authorizes 
a  bond  issue  of  $100,000.  The  issue  is  sold  by  special  salesmen 
at  an  average  price  to  the  investor  of  98 ;  and  a  commission  of 
$3  per  every  Sioo  (par)  is  paid  to  salesmen.  Outline,  giving  the 
journal  entries,  a  method  of  accounting  for  this  case,  explaining 
the  nature  of  all  accounts  used. 


XVIII 

INTEREST  TRANSACTIONS— ASSET  ACCOUNTS 

Investments  in  Securities. 


Under  what  circumstances  would  it  be  proper  for  the  owner 
of  securities  to  ignore  market  changes  in  the  rate  of  interest? 


In  the  published  statements  of  life  insurance  companies  are 
usually  two  valuations  for  securities  owned.  One  is  called  book 
value  and  the  other  market  value. 

What  do  you  understand  is  the  difference  betwen  these  two 
valuations?    Which  is  the  more  important? 

3- 

Stock  and  bond  speculators  keep  in  close  touch  with  market 
quotations  throughout  each  day.  Changes  in  value  during  the 
day  must  be  recognized  immediately. 

Why  is  the  market  of  such  importance  in  this  case? 

4- 

(Form  B) 

An  annuity  of  $5,000,  payable  semiannually  for  20  years,  was 
purchased  by  a  corporation  on  a  5%  basis,  interest  convertible 
semiannually.    The  date  of  purchase  was  Sept.  30. 

(a)  Give  the  entries  on  the  date  of  purchase. 

(b)  Give  the  entries  on  Dec.  31,  the  date  the  books  are 
closed. 


INTEREST  TRANSACTIONS 


199 


(c)  Give  the  entries  on  the  following  March  31,  when  the 
first  semiannual  installment  is  received. 

5- 

(Form  B) 

On  June  30,  following,  (Problem  4)  the  corporation  sells  the 
annuity.    At  this  time  the  market  rate  of  interest  is  6%. 

(a)  Give  the  entries  recording  the  sale. 

(b)  Give  the  entries  on  the  books  of  the  new  owner. 

6. 

If  the  corporation  had  not  sold  the  annuity  (Problem  5)  on 
"June  30,  would  the  change  in  the  market  rate  of  interest  have 
been  recognized?  Give  the  entries  that  would  have  been  neces- 
sary in  this  event  to  show  the  new  value  on  a  6%  basis. 

7- 

(Form  B) 

A  7%,  $1,000  bond  which  matures  June  30,  1921,  interest 
payable  semi-annually,  is  purchased  on  July  i,  1917,  at  a  price 
to  yield  6%.  What  entries  should  be  made  on  the  books  of  the 
purchaser: 

(a)  On  the  date  of  purchase; 

(b)  At  each  interest  payment  date,  assuming  no  change  in 
market  interest  rates ; 

(c)  At  date  of  maturity? 

8. 

(Form  B) 

The  A  Investment  Company  purchases  a  6%,  $10,000  bond, 
due  5  years  from  date,  on  Jan.  i,  191 7.  A  premium  is  paid 
sufficient  to  yield  an  effective  rate  of  5%.  On  March  i,  1917, 
another  $10,000  bond  of  the  same  series  is  purchased  on  the 
same  basis,  including  accrued  interest. 


200  PROBLEMS  AND  EXERCISES 

(a)  What  entries  should  be  made  on  the  investment  com- 
pany's books  for  the  Jan.  i  and  ]\Iarch  i  purchases  ? 

(b)  What  entries  should  be  made  on  July  i  at  the  time  of 
the  regular  bond-interest  payment? 

9. 

The  market  rate  of  interest  for  the  class  of  security  men- 
tioned in  the  last  problem  falls  to  4%  and  the  A  company  de- 
cides to  sell  both  bonds  on  Oct.  i,  1917,  on  this  basis.  Give 
the  journal  entries. 

Interest  in  Fiduciary  Accounting 

10. 

(Form  B) 

A  trustee  for  an  estate  purchased  a  lo-year  annuity  of 
$25,000  payable  in  semiannual  amounts.  Assuming  the  purchase 
to  be  made  on  a  5%  basis,  interest  convertible  semiannually,  pre- 
pare a  table  showing  the  distribution  of  the  rent  between  return 
of  the  principal  sum  and  interest.  Give  the  journal  entries  neces- 
sary to  record  the  purchase  of  the  annuity  and  the  receipt  of  the 
annuity  rents  for  the  first  3  years. 

II. 

A  trustee  for  an  estate  purchases  for  investment  $10,000 
(par  value),  B  Company,  6%  bonds,  due  25  years  from  date.  The 
purchase  was  made  on  a  5%  basis.  At  the  end  of  6  months  he 
receives  $300.  How  much  does  a  life  tenant,  who  is  entitled  to 
all  the  income,  receive? 

12. 

The  trustee  mentioned  in  the  preceding  problem  purchases 
$10,000  of  the  stock  of  the  B  Company.  The  Company  has  main- 
tained a  6%  dividend  for  several  years  and  there  is  every  reason 
to  believe  that  this  rate  will  be  continued  indefinitely.     The  pur- 


LYTEREST  TRANSACTIONS  201 

chase  is  made  on  a  5%  basis.     At  the  end  of  6  months  he  re- 
ceives $300. 

(a)  How  much  will  the  life  tenant,  who  is  entitled  to  all 
the  income,  receive? 

(b)  Explain  fully  why  the  amount  accruing  to  the  life  tenant 
in  this  case  differs  from  that  in  the  case  of  the  bond  purchase. 

13. 
(Form  B) 
The  Eastern  Trust  Company  receives  an  estate  amounting  to 
$105,411.33.  There  are  two  heirs,  A  and  B.  A  is  to  receive  the 
entire  income  from  the  estate  during  her  life ;  B  is  to  receive  the 
principal  ($105,411.33)  at  the  time  of  A's  death.  The  estate  is 
invested  in  $100,000  of  5%  bonds,  payable  in  15  years,  with 
interest  payable  semiannually.     This  gives  an  effective  yield  of 

(a)  Assuming  that  the  trust  company  turns  over  the  income 
of  the  estate  to  A  once  a  year,  and  ignoring  the  Company's  com- 
mission, give  the  journal  entries  covering  the  payment  of  the  first 
year's  income  on  the  books  of  the  trustee. 

(b)  Suppose  that  for  3  years  the  Company  pays  over  as  in- 
come to  A  the  entire  amount  of  the  bond  annuities,  and,  suppose 
further,  that  at  the  end  of  the  3  years  the  estate  reverts  to  B. 
The  trust  company  sells  the  above  bonds  and  pays  B  the  full 
amount  of  the  estate.  Assuming  no  change  in  interest  rates  what 
is  the  loss  to  the  trustee?  Give  journal  entries  on  the  Company's 
books  covering  the  sale  of  the  bonds  and  the  payment  to  B. 

Sinking  Funds 

14. 

(Form  B) 

A  company  issues  $1,000,000  of  20-year,  6%  bonds  on  an 

8%  basis.     There  is  a  sinking  fund  clause  in  the  bond  contract 

requiring  that  a  sum  be  placed  in  the  hands  of  a  trustee  each  year, 


302 


PROBLEMS  AND  EXERCISES 


which  is  sufficient  to  accumulate  to  the  par  of  the  bonds  at 
maturity.  The  trustee  appointed  agrees  to  accept  the  sinking 
fund  contribution  on  a  4%  basis,  convertible  semiannually.  Give 
all  the  entries  on  the  books  of  the  corporation  covering: 

(a)  The  original  issue  of  the  bonds; 

(b)  The  first  and  second  semiannual  interest  payments ; 

(c)  The  first  two  sinking  fund  installments; 

(d)  The  payment  of  the  bonds  at  maturity. 

15. 

Suppose  that  you  had  purchased  $10,000  of  the  bonds  men- 
tioned in  the  preceding  problem,  what  entries  would  you  make  on 
your  books  to  record  the  original  purchase  and  the  first  two  bond- 
interest  payments? 

16. 

The  Emory  Wheel  company  has  some  income  bonds  out- 
standing in  addition  to  an  issue  of  $1,000,000  of  first-mortgage 
bonds.  The  Company  is  required  to  set  aside  a  sinking  fund  to 
retire  the  bonds.  The  sinking  fund  installments  have  been 
charged  against  net  revenue  before  interest  was  allowed  on  the 
income  bonds.  During  the  last  four  years  of  the  life  of  the  first- 
mortgage  bonds,  the  charge  for  the  sinking  fund  reduced  the  net 
revenue  to  such  a  point  that  nothing  was  left  for  the  income  bond- 
holders. After  using  the  sinking  fund  assets  to  pay  the  bonds 
the  directors  instruct  the  bookkeeper  to  carry  the  balance  in  the 
Sinking  Fund  Reserve  account  to  the  Surplus  account.  The  in- 
come bondholders  bring  action  to  compel  the  payment  of  the  un- 
paid interest  for  the  four  years.  Give  your  argument  for  or 
against  the  stand  of  the  income  bondholders. 

17- 

If  a  corporation  which  is  building  up  a  sinking  fund  on  the 
basis  of  annual  deposits  closes  its  books  every  6  months,  should 
accruals  on  the  sinking  fund  be  recognized  ? 


XIX 
ORGANIZATION  AND  CONSTRUCTION 

Organization  Costs 

I. 

What  test  should  be  applied  to  determine  whether  or  not  an 
outlay  during  the  organization  or  construction  period  should  be 
charged  to  a  property  account? 

2. 

"Value  is  a  highly  unstable  aspect  of  structures,  commodities 
services,  rights,  and  situations.  As  far  as  demand  is  concerned  its 
basis  lies  in  usefulness,  either  to  ultimate  consumer  or  to  pro- 
ducer. On  the  supply  side  value  may  be  considered  to  consist  in 
the  bundle  of  costs  which  have  been  incurred  in  bringing  an  item 
to  a  particular  condition.  These  costs  are  very  largely  the  prices 
of  services  which  have  been  performed  in  changing  the  primal 
raw  material,  since  the  tree  in  the  forest  or  the  ore  in  the  ground 
is  commonly  a  trifling  element  in  the  total  cost  of  the  completed 
commodity  or  structure." 

Examine  this  statement  carefully  and  point  out  its  applica- 
tion to  the  problem  of  determinig  property  values  during  the 
organization  and  construction  period. 

3- 

"All  of  the  outlays  necessary  to  the  complete  initiation  of 
the  going  business  may,  for  purposes  of  value  analysis,  be  grouped 
into  two  divisions :  ( i )  those  expenditures  definitely  assignable 
to  particular  physical  structures;  (2)  those  costs  which  are  assign- 
able only  to  the  business  enterprise  in  its  entirety." 


204  PROBLEMS  AND  EXERCISES 

Give  examples  of  each  kind  of  expenditure  and  argue  that 
each  class  is  equally  necessar>'  and  results  in  equally  bona  fide 
balance  sheet  assets. 

4. 
(Form  B) 

:\Ir.  D.  S.  Firedale  has  perfected  a  new  device  for  manufac- 
turing paper  containers.  To  initiate  the  enterprise  it  is  necessary 
to  raise  $ioo,cx)0  to  construct  factory  buildings,  acquire  and  install 
equipment,  buy  necessary  raw  materials,  etc.  To  accomplish  this 
Mr.  Firedale  organizes  a  corporation  with  authorized  capital 
stock  of  $200,000.  He  takes  $50,000  in  stock  in  exchange  for  his 
patent  rights.  The  balance  of  the  stock  is  sold  for  par  through  a 
brokerage  firm.  Broker's  commissions  total  $20,000.  The  incor- 
poration and  legal  fees  (examining  patents,  etc.,)  amount  to 
$5,000.  It  is  necessary  to  employ  a  considerable  staff  in  build- 
ing up  an  organization  with  respect  to  buying,  selling,  factory 
personnel,  etc.  A  considerable  outlay  in  labor  and  materials  is 
likewise  necessar>-  in  preliminary  tests  and  experimentation.  Be- 
fore regular  operations  have  started  outlays  for  these  purposes 
have  totaled  $25,000.  The  remaining  $100,000  was  expended  in 
direct  construction,  equipment,  and  raw  material  costs. 

Prepare  a  balance  sheet  consistent  with  these  facts. 


(Form  B) 

A  corporation  is  organized  for  the  purpose  of  erecting  an 
office  building  in  a  growing  western  town.  An  $100,000  issue  of 
capital  stock  is  authorized.  A  brokerage  company  underwrites 
the  entire  issue  for  $80,000.  All  the  stock  is  sold  at  par.  The 
promoters  are  allowed  $10,000  in  stock  and  $10,000  in  cash  for 
their  services.  An  office  building  is  erected  which  costs  $60,000. 
The  project  gives  every  indication  of  becoming  a  great  success, 
and  the  stock  will  probably  earn  8%  or  better  on  par  permanently. 

Prepare  a  balance  sheet  and  discuss. 


ORGANIZATION  AND  CONSTRUCTION  205 

6. 

A  newly-organized  manufacturing  concern  contracts  with  a 
construction  company  for  the  erection  of  warehouse,  factory  and 
office  building.  The  cost  of  these  structures,  completed,  is  as 
follows:  warehouse,  $12,500;  factory,  $32,000;  office  building, 
$6,500.  Machinery  and  other  equipment  costs  $27,400,  freight  not 
paid.  Freight  and  delivery  charges  amount  to  $600.  The  cost  of 
installing  the  equipment  is  $1,200.  Raw  materials  and  supplies 
are  purchased,  $17,000;  freight  and  delivery  charges  on  same 
amount  to  $380.  Incorporation  fees  are  $125.  Other  legal  ex- 
penses amount  to  $250.  Commissions  paid  to  brokers  for  sell- 
ing the  capital  stock  are  $3,000.  Other  clerical  organization  ex- 
penses amount  to  $400.  Preliminary  advertising  costs  $800.  Ex- 
penditures necessary  to  establish  sales  agencies  amount  to  $2,500. 

Prepare  an  exhibit  of  the  necessary  property  accounts. 

7- 

An  established  manufacturing  corporation  decides  to  expand 
the  enterprise  by  adding  a  new  department  which  shall  be  devoted 
to  the  manufacture  of  certain  special  products.  This  plan  requir- 
es the  expenditure  of  $250,000  for  new  buildings,  machinery  and 
equipment.  To  raise  the  capital  necessary  to  make  this  extension 
it  is  decided  to  issue  bonds  amounting  to  $200,000.  Commis- 
sions and  other  outlays  incident  to  the  successful  floating  of  this 
issue  amount  to  $11,000.  Discuss  the  accounting  treatment  of 
this  last  item. 

8. 

(Form  C) 
The  construction  of  a  store  building  requires  expenditures 
as  follows : 

Cost  of  lot  (including  commission, 

etc.)    $14,000 

Clearing  the  site  and  excavating 700 

Frame  lumber  and  shingles 2,200 

Hardware    2,500 


2o6  PROBLEMS  AXD  EXERCISES 

Carpenters    5'6oo 

Masons    2,900 

Other  labor   1,500 

Brick    2,800 

Cement  and  sand 1,000 

Finishing  lumber 2,500 

Windows  and  doors 800 

Plumbing   900 

Decorator's   contract    1,100 

Miscellaneous    3,700 

Four  hundred  loads  of  dirt  from  the  cellar  excavation  were 
sold  at  40  cents  a  load.  Scrap  lumber  was  cold,  $75.  A  junk 
dealer  paid  $50  for  remnants  of  plumbing  materials  and  other 
scrap  hardware.  Brick  was  returned,  $250.  Scrap  finishing  lum- 
ber was  sold,  $65.  The  firm  was  allowed  a  rebate  of  $40  on  cer- 
tain doors  that  were  not  up  to  specifications. 

Prepare  an  exhibit  of  construction  accounts  recording  the 
above  construction  record,  and  close  these  accounts  into  a  gen- 
eral balance  sheet  account.  Store  Building.  Would  it  be  reason- 
able to  charge  organization  costs  likewise  to  Store  Building,  pro- 
vided this  is  the  only  fixed  asset  which  the  business  acquires? 


(a)  Among  common  organization  costs  are  incorporation 
fees,  lawyers'  charges,  promotion  costs,  underwriters'  commis- 
sions, cost  of  prospectus  and  preliminary^  advertising,  etc.  Explain 
fully  why  such  items  require  special  accounting  treatment,  initial- 
ly, as  compared  with  such  construction  costs  as  salaries  of  drafts- 
men, wages  of  masons  and  carpenters,  costs  of  raw  materials,  etc. 

(b)  *"The  later  treatment  of  organization  costs  is  a  matter 
upon  which  there  is  much  disagreement.  Five  main  possibilities 
suggest  themselves.  Such  costs  may  be  (i)  left  untouched  in  the 
balance  sheet  indefinitely;  (2)  written  oflf  as  soon  as  sufficient 
revenue  is  available  for  the  purpose;  (3)  written  off  gradually 
during  the  entire  life  of  the  corporation  in  the  case  of  the  termin- 


ORGANIZATION  AND  CONSTRUCTION  ^07 

able  company;  (4)  written  off  during  the  term  of  the  particular 
security  issue  from  which  the  funds  were  received;  (5)  written 
off  in  proportion  to  the  net  wasting  of  the  total  of  the  tangible 
assets." 

Discuss,  and  select  the  basis  which  you  think  is  most  reason- 
able, giving  reasons. 

10. 

The  following  represents,  in  summary  form,  the  ledger  of  a 
mining  company  after  10  years  of  operation: 

Mine $300,000  Stockholders'  Equity.  .$250,000 

Equipment 50,000  Allow,  for  Depletion. .    150,000 

Organization  Costs  ..  .     70,000  Allow,  for  Depreciation     25,000 

Current  Assets 25,000  Current  Liabilities  ..  .     20,000 


$445,000  $445,000 

You  find  that  the  depreciation  and  depletion  reserves  cover 
only  the  estimated  value  decline  on  the  items  of  mine  and  equip- 
ment, which  are  carried  in  the  ledger  at  direct  cost.    Discuss. 

Depreciation  During  Construction 

II. 

Give  the  argument  in  support  of  the  contention  that  de- 
preciation (value  decline)  of  the  property  of  an  enterprise  as  a 
Mdiole  cannot  take  place  during  the  construction  period  proper. 

12. 

(Form  B) 

In  constructing  the  property  of  a  certain  enterprise  the  out- 
lay for  small  tools,  forms,  scaffolding,  etc.,  totals  $8,500.  When 
the  plant  is  finally  complete  it  is  estimated  that  these  items 
have  a  remaining  value  of  but  $2,000.  Equipment  purchased  for 
hauling  materials  amounts  to  $4,800.  These  assets  depreciate 
during  the  construction  period,  $1,200.     One  truck  is  sold  for 


2o8  PROBLEMS  AND  EXERCISES 

$1,500;  the  remaining  trucks  and  auxiliary  equipment  (estimated 
value  $2,100)  are  retained  for  use  in  operation.  One  unit  of  the 
plant  is  damaged  by  a  windstorm  while  still  unfinished ;  the  cost 
of  repairing  the  damage  is  $7,200.  There  was  no  cyclone  in- 
surance. 

The  plant,  when  complete,  consists  in  three  main  units; 
namely:  warehouse,  factory,  and  store  and  office  building.  An 
engineer  estimates  that  the  percentages  of  service  life  remaining 
in  the  various  parts  of  the  plant  are  as  follows:  warehouse,  95^0, 
factory,  92%  ;  store  and  office  building,  90%.  These  percentages 
represent  the  greatest  technical  perfection  possible  under  normal 
construction  conditions.  The  costs  of  these  units  (exclusive  of 
any  items  mentioned  above)  are  as  follows:  warehouse.  $15,000; 
factor}^  $60,000 ;  store  and  office  building,  S25.000.  The  total  out- 
lay (including  all  items  mentioned  above)  for  plant  and  other 
assets  from  organization  to  the  beginning  of  the  operating  perioa 
is  $138,000.     Organization  costs  amount  to  $3,500. 

You  are  asked: 

(a)  to  journalize  all  adjustments  covering  depreciation  dur- 
ing construction  (assuming  in  this  case  that  depreciation  is  due 
solely  to  physical  deterioration)  ; 

(b)  to  prepare  the  asset  side  of  the  balance  sheet  at  the 
moment  the  completed  property  is  turned  over  to  the  operating 
officials  (assuming  all  securities  to  be  sold  at  par). 

13- 

"The  balance  sheet  should  show  the  correct  total  of  asset 
values  and  also  the  proper  figures  for  each  important  class  of 
property;  and  if  this  is  to  be  accomplished  in  the  case  of  an  en- 
terprise such  as  a  railroad  company,  which  requires  a  considerable 
period  for  organization  and  construction  and  makes  use  of  man^ 
distinct  kinds  of  assets,  a  property  account  to  record  'deprecia- 
tion' during  construction  is  needed." 

Show  that  this  is  the  case,  giving  illustrative  entries. 


ORGANIZATION  AND  CONSTRUCTION  209 

Interest,  Dividend  and  Tax  Accruals  During  Construction 

14. 

An  electric  railway  corporation  is  organized  with  a  capital 
stock  of  $5,000,000  and  bonded  debt  of  $2,500,000.  We  will 
assume  that  these  securities  are  sold  at  par.  It  requires  i^  years 
to  construct  the  line  and  terminals.  During  this  period  interest 
accrues  on  the  outstanding  bonds  at  the  rate  of  5%  per  annum. 
Discuss  the  accounting  treatment  of  this  interest  charge. 

15- 

A  competitive  line  (see  the  preceding  problem)  is  financed 
entirely  through  stock  issues.  The  capital  in  this  case  is  repre- 
sented by  an  issue  of  6%  preferred  stock,  $5,000,000;  and  $2,- 
500,000  in  common  stock.  We  will  assume  in  this  case  also  that 
all  the  securities  are  sold  at  par.  (This  is  as  likely  in  the  case 
of  a  corporation  financed  entirely  through  stock  issues,  as  where 
both  stock  and  bond  issues  are  used.)  The  construction  period  is 
again  i^^  years.  What  is  the  value  of  the  completed  property? 
Will  the  method  of  financiering  employed  in  this  case  (or  the 
preceding)  affect  the  rates  that  may  be  charged  the  consumer? 

16. 

Give  the  argument  against  charging  interest  or  dividends 
during  the  construction  period  to  property.  How  must  this  argu- 
ment be  modified  in  the  case  of  the  public  utility  whose  rates  are 
not  fixed  by  competition? 

17- 

According  to  the  text  tax  accruals  during  organization  and 
construction  may  properly  be  charged  to  property  account.  Can 
you  justify  an  accounting  practice  which  thus  leads  to  a  perman- 
ent capitalization  of  tax  payments  ?  Do  real  estate  lots  held  for 
an  advance,  for  example,  increase  in  value  because  taxes  are  ac- 
cruing thereon  ? 


2IO  PROBLEMS  AND  EXERCISES 

The  Construction   Period — IlIvEgitimate  Cost 

i8. 

Show  that  the  determination  of  a  normal  organization  and 
construction  period  for  any  given  type  of  enterprise  is  a  very 
difficult  matter.    Can  a  company  start  operations  with  a  deficit  ? 

19. 

In  building  an  electric  line  a  construction  company  is  har- 
rassed  by  an  unusual  number  of  delays  and  accidents.  An  ex- 
ceptionally rainy  season  causes  rapid  deterioration,  renders  the 
transportation  of  materials  difficult  and  hampers  the  construction 
crews.  It  is  estimated  that  extraordinary  losses  from  these 
causes  total  $25,000.  In  bridging  a  river  a  serious  accident  due 
to  careless  planning  on  the  part  of  the  engineers  results  in  the 
loss  of  material  valued  at  $6,000,  and  the  injury  of  several  work- 
men. Payments  in  settlements  of  damage  claims  amount  to 
$7,500.  A  strike  results  in  the  cessation  of  construction  work 
for  several  weeks  and  direct  damage  to  property  amounting  to 
$4,500.  Depreciation  and  other  losses  due  to  this  delay  total 
$2,500. 

The  operating  company  has  agreed  to  purchase  the  completed 
line  of  the  construction  company  at  actual  cost  plus  6%,  (This, 
we  will  assume,  is  not  an  unreasonable  agreement  under  normal 
conditions.)  This  agreement  is  consummated ;  the  property  being 
taken  over  at  the  figure  shown  by  the  construction  company's 
records,  $475,000. 

At  what  value  should  this  property  be  entered  on  the  oper- 
ating company's  balance  sheet  ?    Discuss  fully. 

20. 

A  power  company  is  required  to  scrap  machinery  valued  at 
$13,000  almost  as  soon  as  the  plant  is  completed.  The  scrap 
value  is  $2,500.    New  machinery  of  an  improved  type  which  costs 


ORGANIZATION  AND  CONSTRUCTION  ^n 

$26,000  is  purchased.    The  bookkeeper  makes,  in  summary  form, 
the  following  entries : 

Cash   ( from  scrap)    $2,500 

Old   Machinery $2,500, 

and, 

New  Machinery    $26,000 

Cash    $26,000. 

Discuss  fully  the  propriety  of  such  accounting. 

21. 

A  promoter  organizes  a  corporation  for  the  ostensible  pur- 
pose of  manufacturing  a  new  article.  The  stock  is  sold  in  small 
lots  to  a  considerable  number  of  investors  but  the  promoter  is  able 
to  retain  control  of  the  directorate.  Through  his  influence  con- 
tracts for  construction  work  are  awarded  to  a  company  in  which 
he  is  particularly  interested.  This  company  charges  $50,000 
more  than  could  reasonably  be  considered  a  fair  price  for  con- 
struction work.  In  addition  the  promoter  receives  $25,000,  cash, 
for  "overseeing"  the  building  operations.  An  expert  could  have 
been  employed  for  the  same  work  for  $5,000. 

You  are  called  in  as  an  accountant  to  prepare  a  balance  sheet. 
How  would  you  treat  the  expenditures  mentioned? 

Discounts  on  Securities 


22. 

(a)  What  is  the  general  basis  for  the  distinction  between 
the  construction  period  and  the  developmental  or  experimental 
period?  Show  by  illustration  that  it  is  often  a  very  difficult  matter 
to  draw  a  hard  and  fast  line  between  the  two  cases. 

(b)  Why  are  such  questions  as  the  determination  of  the 
construction  period  of  much  greater  importance  in  connection 
with  public-utility  enterprises  than  in  competitive  lines? 


212  PROBLEMS  AND  EXERCISES 


23. 


A  company  organizes  with  an  authorized  capital  of  $100,000, 
par  $100.  The  prospects  for  financial  success  are  bright  and  the 
entire  issue  of  stock  is  sold  at  $120  per  share.  Six  months  after 
organization,  and  before  earnings  have  begun  to  accrue,  one  of 
the  directors  suggests  that  it  would  be  desirable  to  pay  out  as 
dividends  at  least  a  part  of  the  organization  profit  gained  by  sell- 
ing the  capital  stock  at  a  premium.  Discuss  this  proposition 
fully. 

24. 

A  corporation  is  organized  with  a  capital  of  $500,000,  par 
$100.  The  stock  is  sold  at  90.  It  is  urged  by  the  promoters  that 
the  10%  discount  is  a  cost  of  securing  the  capital  and  hence  is  a 
property  charge.  What  is  your  opinion?  Give  the  journal  en- 
tries which  should  be  made  to  cover  this  issue  of  stock. 

Suppose  the  bookkeeper  makes  the  following  entry  when  the 
above  mentioned  stock  is  issued : 

Cash    $450,000 

Capital  Stock $450,000. 

Discuss  this  procedure  fully,  explaining  its  advantages  and 
disadvantages.  What  is  the  significance  of  par  value  in  stocks? 
How  do  bonds  and  similar  securities  differ  in  this  regard? 

25. 

"The  par  of  a  bond  represents  the  amount  which  must  be  paid 
at  maturity.  The  par  of  the  bond  is  the  actual  liability ;  the  bond- 
holder has  a  claim  against  the  corporation  equal  at  all  times  to 
the  par  of  the  bond.  Hence  bond  discount  is  a  cost  of  capital. 
On  the  other  hand  bond  premium  is  clearly  a  profit  on  the  sale 
of  the  security ;  it  is  only  the  par  of  the  bond  which  must  be 
repaid,  not  its  price." 

Discuss.  Might  the  accounting  liability  be,  in  a  measure, 
distinct  from  the  legal  liability? 


XX 

THE  BASIS  FOR  REVALUATION 
The  Generai,  Significance  of  Value  Changes 


"For  the  most  part  valuation  during  the  organization  and 
construction  period  consists  in  the  determination  of  bona  fide  pur- 
chase prices.  In  other  words,  mere  incidence  of  expenditure 
must  be  carefully  observed.  Does  a  particular  outlay  result  in  the 
acquisition  of  a  genuine  asset  value,  and  what  is  the  nature  of  the 
asset?  is  the  question  which  must  frequently  be  asked  in  such 
cases.  In  this  process  of  preliminary  valuation  true  market  prices 
are  a  fairly  reliable  guide. 

"After  operations  have  begun  the  further  problem  of  rezvlu- 
ation  arises.  In  the  process  of  preparing  the  periodic  income 
sheet  and  balance  sheet  it  is  necessary  to  reclassify  these  initial 
outlays,  to  divide  them  between  the  two  financial  statements,  or, 
in  other  words,  to  separate  them  into  revenue  charges  and  asset 
balances.  And  this  is  a  much  more  difficult  type  of  valuation.  It 
is  not  out  of  the  question  to  determine,  with  reasonable  accuracy, 
the  construction  cost  or  purchase  price  of  the  machine,  the  build- 
ing, the  mine  shaft,  or  even  the  railway  line.  To  determine 
rationally  the  siihscqucyit  value  of  any  such  item,  however,  the 
value  remaining  after  a  significant  period  of  operation  has  elaps- 
ed, taxes  every  resource  of  the  accountant  or  engineer.  Suffic- 
iently difficult  at  best,  the  matter  is  seriously  complicated  by  price 
movements." 

(a)  Show  that,  in  a  sense,  revaluation  and  appraisal  is  often 
necessary  during  the  organization  of  the  particular  enterprise  as 
well  as  subsequent  thereto,  especially  in  the  case  of  the  corpora- 


214  PROBLEMS  AND  EXERCISES 

tion.     Show,  however,  the  contrast  between  the  purposes  of  pre- 
liminary valuation  and  revaluation  arising  during  operation. 

(b)  Explain  the  fact  that  although  bona  fide  construction 
cost  or  purchase  price  is  universally  conceded  to  be  the  proper 
basis  for  initial  asset  values  there  is  much  difference  of  opinion 
as  to  the  proper  starting  point  in  revaluation. 

(c)  Show  that  the  above  quotation  does  not  adequately  ex- 
press the  problem  of  valuation  in  the  case  of  current  assets. 

2. 

The  balance  sheet,  of  which  the  left-hand  side  consists  in  a 
list  of  asset  titles  with  a  money  amount  attached  to  each,  is  fre- 
quently said  to  "represent  the  financial  condition  of  an  enterprise 
at  a  particular  moment  of  time."  In  view  of  this  conception  of 
the  balance  sheet  should  there  be  any  close  relation  between  cur- 
rent market  prices  and  the  values  attached  to  specific  items  in  the 
statement?  Show  that  the  balance  sheet  often  expresses  simply 
an  adjusted  investment  position,  instead  of  actual  financial  status. 
Show  further  that  even  under  the  most  favorable  circumstances 
a  statement  of  assets  and  equities  is  a  very  inadequate  picture 
of  the  underlying  financial  condition  of  a  business  concern. 

3. 

"Accounting  deals  with  value  facts,  and  value  is  essentially 
a  concept  of  economics."  Does  this  mean  that  a  value  for  ac- 
counting purposes  must  always  be  identical  with  market  value? 
Explain  fully. 

4. 

Some  accountants  object  to  the  explicit  recognition  of  accrued 
value  changes  in  the  accounts,  particularly  in  the  case  of  appre- 
ciation, on  the  ground  that  the  accountant  should  confine  his  work 
to  the  record  of  "actual"  transactions.  \'alue  changes,  according 
to  this  position,  do  not  become  actual — are  not  '"realized"  except 
through  purchase  or  sale. 


BASIS  FOR  REVALUATION 


215 


Admitting  that  the  accountant  should  keep  a  systematic 
record  of  all  actual  business  occurrences,  show  clearly  that  ac- 
counting must  go  far  beyond  this  and  that  some  accrued  value 
changes  must  be  recognized. 

Valuation  and  Management 

5. 

What  are  the  functions  of  the  manager?  Show  how  ac- 
counts and  financial  statements,  especially  those  dealing  with  as- 
sets and  expenses,  can  be  used  by  the  manager  to  facilitate  the 
perfomiance  of  these  functions. 

6. 

"Any  business  manager  who  takes  advantage  of  an  increase 
in  the  price  of  raw  materials  and  advances  the  price  of  his  finished 
product  correspondingly  before  he  has  consumed  all  of  the  stocks 
he  had  purchased  at  lower  prices  is  a  profiteer !" 

(a)  What  is  your  opinion  of  this  assertion?  If  the  state- 
ment were  valid  what  basis  of  valuation,  from  the  manager's 
standpoint,  must  of  necessity  be  accepted  ? 

(b)  Prepare  a  statement  which  is  the  converse  of  the  above. 
Such  a  statement  would  begin  something  like  this :  '"Any  manager 
who  takes  advantage  of  a  fall  in  prices  of  raw  materials  and  low- 
ers his  selling  price  before  ....  etc." 

7- 

The  purchasing  agent  of  the  X  Alfg.  Co.,  foreseeing  an  ad- 
vance in  the  prices  of  raw  materials,  buys  heavily  at  August 
prices.  By  Dec.  31  there  has  been  an  advance  of  approximately 
50%.    The  inventor}-  at  this  time  is  $100,000,  taken  at  cost. 

Can  the  management  rely  upon  this  inventory  figure  in  em- 
barking on  production  policies?  Explain  fully.  (In  this  connec- 
tion review  Problem  42,  Chapter  X.) 


2i6  PROBLEMS  AND  EXERCISES 


"An  increase  in  the  value  of  contiguous  land  adds  nothing  to 
the  utility  of  the  Company's  manufacturing  site.  The  wheels  will 
run  no  faster;  no  more  goods  will  be  produced;  costs  will  not 
thereby  be  lowered.  Indeed,  such  appreciation  is  a  detriment  to 
the  business  rather  than  an  advantage  because  it  is  sure  to  lead  to 
increased  property  taxes.  To  recognize  such  a  change  as  causing 
an  addition  to  the  company's  assets  is  accordingly  the  height  of 
folly." 

(a)  Present  a  similar  argument  to  the  effect  that  the  in- 
crease in  the  cost  of  any  item  used  in  production  is  a  disadvantage 
to  the  management.  Show  that  it  does  not  thereby  follow,  how- 
ever, that  such  increasing  costs  should  not  be  recognized  in  the 
accounts. 

(b)  Show  carefully  that,  from  the  long-run  standpoint,  it  is 
of  the  utmost  importance  for  the  management  of  even  a  manufac- 
turing establishment  to  be  fully  cognizant  of  changes  in  land 
values. 

The  Measurement  oe  Investment  or  Sacrifice 

9- 

"In  the  railroad  and  public  utility  fields,  where  prices  are  not 
determined  exclusively  by  competitive  forces,  it  is  important  that 
the  integrity  of  investment  be  preserved." 

Assuming  that  investment  is  such  cases  should  be  maintained, 
which  basis  of  valuation  is  most  reasonable,  cost  or  cost  of  re- 
placement? Should  the  number  of  dollars  merely  be  maintained 
or  should  the  purchasing  power  of  the  dollars  originally  invested 
be  preserved?    Explain  fully. 

ID. 

"In  the  case  of  the  ordinary  competitive  enterprise  it  is  not 
the  function  of  the  accounts  to  show,  continuously,  original  in- 
vestment.   It  is  rather  precisely  their  funtion  to  follow  the  Huctu- 


BASIS  FOR  REVALUATION  217 

ations  in  that  investment  as  it  takes  shape  in  specific  structures, 
commodities,  rights,  services,  and  conditions.  Therefore  it  is 
specific  price  changes  and  not  the  change  in  the  value  of  money  in 
which  the  accountant  is  interested." 

Argue  in  support  of  this  statement. 

Special  Objections  to  the  Recognition  oe  Appreciation 

II. 

"Appreciation  should  not  be  recognized.  A  change  in  the 
industrial  situation  might  wipe  out  the  appreciation  after  it  had 
been  recorded ;  and  thus  a  profit  would  be  shown  in  one  period 
and  a  loss  in  the  next  without  any  sale  taking  place." 

Admitting  the  truth  of  this  statement,  argue  that,  ideally,  it 
is  the  function  of  accounting  to  disclose  just  such  situations. 

12. 

"If  appreciation  is  recognized  in  connection  with  a  fixed 
asset  such  as  a  machine  it  will  be  necessary  to  increase  the  depre- 
ciation charges  during  the  service-life  of  the  unit  by  an  exactly 
equivalent  amount ;  and  the  net  effect  upon  the  accounts  through- 
out the  entire  period  will  accordingly  be  nil." 

Discuss  carefully. 

13. 

•■'If  a  particular  tract  is  so  completely  removed  from  the 
market  that  an  advance  in  the  price  of  contiguous  land  can  have 
no  efifect  whatever  upon  the  policies  of  the  management  over  a 
long  period  of  years,  there  has  been  no  true  ajppreciation  and 
none  should  be  recognized  on  the  books." 

Illustrate  and  discuss. 

14. 

"Appreciation  can  never,  in  any  sense,  be  said  to  constitute 
realized  income.  If  the  Bureau  of  Internal  Revenue,  for  ex- 
ample, were  to  treat  appreciation  as  gain,  business  men  would  in 


2i8  PROBLEMS  AND  EXERCISES 

many  cases  be  seriously  embarrassed.  The  tax  levy  would  be  in- 
creased because  of  the  fact  of  appreciation  but  no  cash  would 
thereby  be  received  with  which  to  pay  the  additional  assessment." 

(a)  What  theory  as  to  the  nature  of  net  income  is  implicit 
in  this  statement.  Show,  by  stating  explicitly  the  accounting  pro- 
cesses which  give  rise  to  the  net  revenue  balance,  that  any  such 
conception  of  business  income  is  entirely  erroneous  from  the 
standpoint  of  fully  accepted  accounting  practices. 

(b)  Show  concretely  that,  without  the  recognition  of  appre- 
ciation, a  business  enterprise  may  be  very  seriously  embarrassed 
by  a  large  income  and  excess  profits  levy;  that  it  may  even  be 
necessary  for  a  corporation  to  borrow  money  to  pay  taxes  based 
on  a  profit  determined  by  thoroughly  conventional  accounting. 

(c)  Formulate  a  definition  for  profit  realization  which  you 
consider  satisfactory. 

15. 

A  and  B  each  have  $1,000  at  the  beginning  of  the  year. 
Each  buys  10  shares  of  Corbin  Steel  stock  @  100,  including  com- 
missions, etc.  In  July  B,  who  enjoys  active  trading,  sells  Corbin 
Steel  @  no,  net,  and  buys  Balding  Engine  at  the  same  price. 
In  September  he  sells  Balding  @  115  and  buys  Western  Oil  @ 
50.  Late  in  December  he  decides  to  go  back  to  Corbin  Steel 
which  is  then  selling  at  138.  He  accordingly  sells  his  Western 
Oil  at  a  price  of  60,  and  buys  10  shares  of  Corbin  Steel  with  the 
proceeds.  Meanwhile  A,  trusting  in  the  future  of  Corbin  Steel 
has  "sat  tight." 

(a)  How  much  profit  has  B  "realized'.'  during  the  year 
according  to  conventional  bookkeeping?  How  much  has  A 
realized  ? 

(b)  Argue  that  actually  each  has  made  the  same  profit,  which 
is  as  fully  realized  in  one  case  as  in  the  other. 

(c)  Write  out  an  analogous  case  using  a  period  of  one 
month  and  assuming  that  A  and  B  are  lumber  wholesalers. 


BASIS  FOR  REVALUATION  219 

16. 

"The  recognition  in  explicit  entries  of  the  appreciation  of 
either  current  or  fixed  assets  should  always  be  avoided.  Such  ap- 
preciation in  the  nature  of  the  case  will  be  based  upon  estimate 
or  guess,  and  accounting  should  deal  with  certainties,  not  esti- 
mates." 

(a)  Show  that  the  statements  prepared  by  the  accountant 
must  inevitably  be  based  on  estimate  at  significant  points. 

(b)  Argue  that  appreciation  can  be  more  accurately  guaged 
than  can  decline  in  value. 

17. 

Show  that  the  income  figure  in  a  particular  case  may  be 
swollen  by  many  other  practices  than  the  recognition  of  apprecia- 
tion. Argue  that  an  attitude  of  consistent  conservatism  is  not 
inconsistent  with  the  practice  of  taking  inventory  of  current  as- 
sets at  bona  fide  cost  of  replacement. 

18. 

"Appreciation  means  nothing  to  the  investors.  It  is  out  of 
the  question  to  base  dividends  on  such  value  changes." 

(a)  Does  the  second  sentence  prove  the  first? 

(b)  Show  that  dividends  might  conceivably,  in  special  cases, 
be  based  on  appreciation. 

(c)  State  definitely  the  various  conditions  which  must  be 
present  if  cash  dividends  are  to  be  safely  paid,  and  show  that  it 
may  not  always  be  wise  to  pay  dividends  even  if  profits  have  been 
secured  through  sales. 

ig. 

"In   deciding   upon   a   basis    for  valuation   various   circum- 

.   stances  should  influence  the  accountant's  decision.    Hard  and  fast 

rules  must  not  be  blindly  applied  to  all  cases.    The  nature  of  the 

enterprise,  the  purposes  to  be  served  by  the  accounts,  the  kind  of 


220.  PROBLEMS  AND  EXERCISES 

property  involved  in  any  case, — these  and  other  factors  must  be 
taken  into  account  if  rational  conclusions  are  to  be  reached." 

With  concrete  illustrations  demonstrate  the  reasonableness 
of  this  statement. 

20. 

"The  typical  trader  or  manufacturer  is  not  a  speculator ;  he 
is  rather  in  the  business  of  producing  some  commodity  or  service 
for  sale  on  the  market.  The  essence  of  his  business  is  regular 
operation;  the  capstone  of  the  process  is  the  sale.  It  is  accord- 
ingly thoroughly  good  practice  to  state  profits  in  terms  of  sales, 
and  not  in  terms  of  mere  price  changes." 

(a)  Show  that  virtually  every  business  enterprise  involves 
speculation  in  the  broad  sense. 

(b)  Argue,  nevertheless,  that  even  if  assets  were  generally 
inventoried  on  a  cost  of  replacement  basis,  appreciation  income 
would  commonly  only  be  an  incidental  and  supplementary  income, 
net  revenue  arising  for  the  most  part  as  stated  above,  from  sales. 


XXI 

THE  VALUATION  OF  SPECIAL  ASSETS 

I. 

What  is  the  first  step  in  all  valuations,  whatever  basis  for 
valuation  be  Used? 

Cash  and  Receivables 

2. 

(a)  How  does  it  happen  that  in  the  case  of  cash  the  trial 
balance  figures  usually  give  the  correct  conclusion  for  the  balance 
sheet?  Show  that  in  some  countries  today  (and  even  occasionally 
in  the  United  States)  the  problem  of  converting  different  kinds  of 
cash  to  a  common  denominator  faces  the  accountant. 

(b)  Enumerate  the  various  classes  of  items  which  may 
properly  be  included  under  the  balance  sheet  caption,  "cash." 

(c)  State  the  essential  steps  involved  in  taking  the  cash  in- 
ventory. 

3- 

What  is  the  essential  dift'erence  between  a  company's  "bank 
balance"  and  the  outstanding  accounts  receivable  ? 

4- 

Under  the  provisions  of  Regulations  45 — the  rules  issued 
by  the  Bureau  of  Internal  Revenue  to  supplement  the  present 
federal  income  and  profits  tax  law — only  the  amount  of  those 
customers'  balances  which  have  actually  been  proved  to  be  worth- 
less, currently,  may  be  treated  as  an  allowable  deduction  in  the 
determination  of  net  taxable  income.     What  method  of  valuing 


222 


PROBLEMS  AND  EXERCISES 


accounts  receivable  is  implicit  in  this  ruling?  Do  you  consider 
this  method  a  satisfactory  scheme  in  the  case  of  a  company  with 
a  long  list  of  customers?    Explain  fully. 


In  finally  determining  the  status  of  a  particular  customer's 
account,  what  consideration  should  be  given  to  the  following :  ( i ) 
acceptance  of  proffered  discounts;  (2)  fluctuation  of  balance;  (3) 
credit  ratings ;  (4)  nature  of  business.  Explain  fully.  Can  you 
mention  other  factors  of  importance? 

6. 

(Forms  B  and  C) 

On  Jan.  i,  1919,  A's  books  show  a  credit  balance  in  the  Allow- 
ance for  Doubtful  Accounts  of  $400.  Accounts  Receivable  shows 
a  debit  balance  of  $18,000.  During  1919  the  books  are  closed 
each  quarter.  A  directs  the  bookkeeper  to  charge  revenue  each 
period  with  5%  of  the  outstanding  accounts  at  the  end  of  each 
period.  All  sales  are  on  account,  the  figures  for  each  quarter 
being  as  follows:  (i)  $20,000;  (2)  $29,000;  (3)  $16,000;  (4) 
$42,000.  Collections  each  quarter  are  as  follows:  (i)  $25,000; 
(2)  $32,000;  (3)  $12,000;  (4)  $31,000.  Specific  worthless  ac- 
counts are  written  off  during  the  various  quarters  as  follows :  ( i ) 
$500;  (2)  $1,300;  (3)  $200;  (4)  $400. 

(a)  Exhibit  in  summary  form  the  journal  entries  made  by 
the  bookkeeper  covering  the  above  situation  for  the  year,  and 
show  skeleton  accounts  for  Sales,  Allowance  for  Doubtful  Ac- 
counts, and  Accounts  Receivable  as  these  accounts  would  appear 
after  all  these  entries  were  posted. 

(b)  Assuming  that  an  examination  of  the  business  for  sev- 
eral years  shows  that  about  2%  of  all  sales  are  not  collected,  show 
the  entries  which  should  have  been  made  during  the  first  quarter. 
Explain  fully  why  this,  and  not  the  procedure  under  (a),  is  cor- 
rect. 


VALUATION  OF  SPECIAL  ASSETS  223 

(c)  Assuming  that  sales  and  collections  during  1919  are 
fairly  normal,  what  evidence  do  you  find  in  the  above  situation  as- 
to  the  proper  rate  to  use  in  determining  the  periodic  allowance 
for  uncoUectibles  ?     Explain  fully. 


In  what  account  would  you  place  trade  acceptances?  On 
what  basis  would  you  value  such  paper  for  balance  sheet  pur- 
poses? 

How  do  interest  accruals  enter  into  the  valuation  of  current 
receivables  ? 

Merchandise  and  Goods  in  Process 

8. 

In  taking  inventory  of  stock  in  hand  the  trader  commonly 
uses  invoice  prices,  thus  neglecting  transportation  charges,  un- 
packing, marking  and  shelving  costs,  insurance  etc.  State  ex- 
actly how  this  practice  affects  the  balance  sheet  and  the  statement 
of  income.  Do  you  see  any  justification  for  this  procedure  in 
the  case  of  the  typical  retailer? 

9- 

A  dealer  buys  1,000  bolts  of  cloth  at  an  invoice  price  of  $4.00 
each.  Freight  charges  amount  to  $180.  Drayage,  marking,  un- 
packing, and  shelving  costs  total  $95.  During  the  following  per- 
iod 300  bolts  are  sold?  What  is  the  inventory  at  the  end  of  the 
period  on  a  cost  basis  ?  Show  clearly  how  this  situation  would  be 
handled  in  the  accounts.  (In  this  connection  review  Problem 
26,  Chapter  VI.) 

10. 

"The  problem  of  valuing  goods  in  process  is  essentially  the 
problem  of  cost  allocation."     Explain. 


224  PROBLEMS  AND  EXERCISES 

II. 

The  A  Company  begins  business.  During  the  first  year  mate- 
rials purchased  amount  to  $37,000;  sales  total  $43,000;  expendi- 
tures for  labor,  supplies  and  other  items  amount  to  $18,000. 
At  the  end  of  the  year  materials  still  in  the  store  room  have  a 
value  of  $6,200.  Charges  for  labor,  supplies,  etc.,  applicable 
to  goods  sold  amount  to  $14,000;  there  remain  on  hand  of  such 
items,  unused  supplies,  services,  etc.  amounting  to  $940.  The 
material  cost  of  goods  sold  amounts  to  $24,000. 

What  is  the  inventory-,  in  total,  of  goods  in  process  and  in 
stock  on  a  cost  basis  ?  Show  how  this  situation  might  be  handled 
in  the  accounts. 

12. 

A  certain  firm  has  on  hand  Dec.  31,  1917,  supplies  which 
cost  $6,500.  Cost  of  replacement  is  now  $7,000.  In  preparing 
statements  and  closing  the  accounts  how  do  you  recommend  that 
this  matter  should  be  treated?  AVhat  entries  would  be  necessary 
to  recognize  the  item  of  appreciation  in  the  accounts?  Suppose 
these  entries  have  been  made,  and  that  on  Jan.  15,  1918,  the 
assets  in  question  are  sold  for  $7,500,  what  entries  would  now  be 
necessary?     Explain  any  doubtful  points. 

13- 

Show  concretely  that  it  would  ordinarily  be  necessary  to  dis- 
tinguish individual  lots  in  such  a  way  that  particular  articles  on 
hand  could  be  identified  in  terms  of  specific  invoices  in  order  to 
determine  the  literal  cost  of  goods  in  stock. 

14. 

"In  the  case  of  goods  in  stock  which  have  been  purchased  at 
various  prices  no  cost  method  of  determining  inventory,  whether 
weighted  averages  are  used  or  not,  would  be  consistent  with  the 
law  of  single  price." 

Show  with  an  illustration  that  this  statement  is  correct. 


VALUATION  OF  SPECIAL  ASSETS 


15. 


225 


"The  most  reasonable  scheme  for  determining  cost  of  goods 
on  hand  is  based  on  the  assumption  that  current  stock  consists 
in  the  most  recent  purchases,  or,  in  other  words,  that  goods  sold 
or  utilized  are  always  taken  from  the  oldest  in  stock.  This  plan 
has  been  adopted  by  the  Bureau  of  Internal  Revenue  in  dealing 
with  transactions  in  securities  where  lots  can  not  be  conveniently 
distinguished,  and,  informally,  in  connection  with  merchandise 
inventories." 

(a)  Show  that  the  assumption  stated  above  would  not  al- 
ways conform  to  the  actual  physical  facts  of  the  case.  Argue, 
nevertheless,  that  it  is  reasonable  from  the  economic  standpoint. 

(b)  Show  that  this  method  of  pricing  would  approximate 
the  use  of  cost  of  replacement  in  many  cases. 

(c)  Using  an  illustration  show  precisely  how  the  inventory 
figure  would  be  determined  according  to  the  above  suggestion. 

(d)What  assumption  with  respect  to  the  identity  of  lots  on 
hand  and  the  order  of  sale  or  other  utilization  is  implicit  in  the 
weighted  average  method  of  taking  inventory? 

16. 

"In  order  to  determine  the  cost  of  replacement  of  a  manu- 
facturer's work  in  process  or  finished  stock  it  would  be  necessary 
as  a  preliminary^  to  discover  actual  cost  in  any  case." 

(a)  What  do  you  understand  "cost  of  replacement"  to  mean 
in  the  case  of  semifinished  goods? 

(b)  Demonstrate  the  validity  of  the  above  statement. 

"In  view  of  the  fact  that  cost  of  replacement  is  the  only  cost 
influencing  prices  in  the  long  run,  cost  of  replacement  of  current 
assets  becomes  actual  ejfcctive  cost  from  the  managerial  stand- 
point."   Discuss. 


226  PROBLEMS  AND  EXERCISES 

i8. 

"If  the  value  of  direct  labor  passes  into  the  product,  so  does 
that  of  indirect  labor,  depreciation,  administration,  and  even  of 
the  services  performed  by  the  owners  themselves.  The  economic 
relationship  is  no  less  direct  in  one  case  than  in  the  other.  In 
other  words,  the  value  of  the  completed  article  ready  to  ship  is 
virtually  selling  price  to  both  buyer  and  seller,  and  the  article 
should  be  inventoried  accordingly."    Discuss. 

19. 

The  Bureau  of  Internal  Revenue,  under  certain  circum- 
stances, permits  farmers,  for  purposes  of  their  income  tax  re- 
turns, to  inventory  unsold  produce  at  market  price  less  estimated 
marketing  cost.  Copper  mining  companies  occasionally  follow 
the  same  practice ;  and  some  accountants  have  urged  that  this  is 
the  proper  general  rule  throughout  the  extractive  industries. 

(a)  Giving  an  illustration,  show  that  this  method  of  valua- 
tion permits  profits  to  be  recognized  prior  to  sale. 

(b)  What  criterion  of  income  is  being  substituted  for  the 
sale  in  such  a  case? 

(c)  Can  you  justify  this  scheme  of  pricing  in  the  case  of 
the  farmer  or  miner? 

20. 

A  shipbuilding  company  received  orders  early  in  1918  for 
several  vessels.  At  the  end  of  the  year  the  work,  in  terms  of  total 
estimated  cost,  w^as  about  half  completed.  The  management  de- 
cided to  accrue  50%  of  the  estimated  total  net  profit  on  these  con- 
tracts. What  method  of  valuing  unfinished  hulls  was  followed? 
Explain  fully.  What  criterion  of  income  is  being  followed  in  this 
case? 

21. 

A  certain  rnerchant  begins  business  Jan.  i.  He  decides  to 
close  his  books  and  prepare  statements  at  the  end  of  each  month. 
During  the  month  he  buys  goods  which  cost  $100,000.     On  Jan. 


VALUATION  OF  SPECIAL  ASSETS  227 

31  the  stock  on  hand,  at  cost,  amounts  to  $50,000.  At  current  buy- 
ing prices  goods  on  hand  would  cost  $40,000.  The  merchant^- 
ventories  at  "cost  or  market,  whichever  is  lower."  At  the  end 
of  the  next  month,  he  still  has  half  of  these  goods  on  hand.  Cost 
amounts  to  $25,000.  At  new  buying  prices,  however,  these  goods 
would  now  cost  $22,500. 

Discuss.  Show,  in  view  of  this  illustration,  that  an  accountant 
cannot  consistently  argue  that  the  sale  is  the  sole  proper  criterion 
of  income  and  at  the  same  time  advance  "cost  or  market,  which- 
ever is  lower"  as  the  only  reasonable  method  of  pricing  inventory. 

22. 

A  certain  drug  manufacturer  who  turns  out  over  2,000  dis- 
tinct commodities  finds  it  impracticable  to  attempt  to  follow  costs 
of  work  in  process  and  finished  stock.  He  accordingly  takes  in- 
ventory of  goods  on  hand  by  subtracting  from  list  selling  price 
estimated  shipping  and  marketing  costs,  factory  costs  yet  to  be  un- 
dertaken, and  estimated  profit. 

Discuss. 

23. 

Discuss  the  valuation  of  the  securities  (for  purposes  of  clos- 
ing the  books  and  preparing  statements)  involved  in  each  of  the 
following  situations:  (a)  U.  S.  Steel  common  stock  owned  by  a 
speculator;  (b)  farm  mortgages  held  by  a  life  insurance  company; 
(c)  municipal  bonds  (bought  at  $90)  representing  the  endow- 
ment funds  of  a  university;  (d)  Penn.  Railroad  Co.  bonds  owned 
by  a  trust  company. 

24. 

A  certain  investment  company  deals  freely  in  many  kinds  of 
contractual  securities,  seldom  holding  a  particular  block  for  a  long 
period.  As  purchased,  all  items  are  charged  at  cost  (including 
brokerage)  to  a  single  "Securities"  account.  As  particular  blocks 
are  sold  this  account  is  credited  at  sales  price  less  commissions ; 
and  it  is  also  credited  with  all  annuities,  interest,  and  dividends 


228  PROBLEMS  AND  EXERCISES 

received  on  securities  held.  Inventory  of  securities  on  hand  is 
always  taken  at  market  price  in  so  far  as  there  is  an  established 
market.     Discuss  this  procedure. 

Machinery,  Buildings  and  Land 

25- 

At  the  end  of  the  accounting  period  what  general  considera- 
tions should  be  stressed  in  the  classification  of  expenditure  upon 
fixed  assets  between  maintenance  and  improvement? 

26. 

Argue  that  minor  changes  in  construction  costs  of  fixed 
assets  should  not  be  made  the  basis  for  accounting  entries  af- 
fecting the  valuations  of  items  already  in  use. 

27. 

A  certain  company  builds  an  addition  to  its  plant  and  installs 
an  equipment  for  a  special  laboratory.  Expenditures  for  the  new 
structure  total  $32,000.  Equipment  is  purchased  amounting  to 
$27,000,  delivered.  This  equipment  is  installed  by  workmen 
who  are  on  the  company's  regular  payroll.  Wages  of  these 
workmen  while  so  employed  total  $300.  Parts  and  supplies  from 
the  company's  storeroom  are  used  in  this  work  which  have  a  cost 
of  $125.  If  the  equipment  had  been  installed  by  the  firm  from 
which  the  purchase  was  made  the  installation  cost  would  have  been 
$800.  In  addition  to  this  equipment  purchased,  the  company 
constructs  and  installs  with  its  own  material  and  mechanics  some 
special  equipment.  Materials  are  used  in  this  work  from  the 
storeroom  which  cost  $1,300;  workmen's  salaries  applicable  to 
this  job  total  $3,400.  If  purchased  outside  this  equipment  would 
have  cost  $6,500. 

What  is  the  value  of  the  new  laboratory?  Show  how  this 
situation  should  be  handled  in  the  accounts.  Do  you  need  more 
information  than  is  given? 


VALUATION  OF  SPECIAL  ASSETS  229 

28. 

Discuss  the  valuation  of  land  (a)  in  the  case  of  a  railroad 
company,  and  (b)  in  the  case  of  a  real  estate  firm  engaged  in 
land  speculation. 

29. 

Show  that  liquidating  values  are  not,  in  general,  a  proper 
basis  for  booking  fixed  assets. 

Miscellaneous 

30. 

State  what  you  consider  to  be  the  proper  rule  of  valuation 
for  income  and  balance  sheet  purposes  in  connection  with  each  of 
the  following  assets:  (i)  standard  brass  castings;  (2)  prepaid 
fire  insurance;  (3)  liberty  bonds;  (4)  accounts  receivable;  (5)  a 
chattel  mortgage  on  farm  equipment;  (6)  a  linotype  machine  in 
the  hands  of  a  printing  company;  (7)  a  timber  tract;  (8)  a  gold 
mine;  (9)  goodwill;  (10)  stock  of  ladies'  hats;  (11)  Ford  chassis 
in  hands  of  manufacturer;  (12)  hull  of  unfinished  warship;  (13) 
Daylo  flash  lights,  ready  to  ship  from  factory;  (14)  wheat  in  the 
grower's  bins. 


XXII 

THE  DEPRECIATION  ACCOUNTS 
The  Depreciation  Problem 


"Depreciation  accounting  consists  primarily  in  the  rational 
apportionment  of  the  cost  of  fixed  tangible  assets  over  a  series  of 
expense  accounts." 

Why  is  the  term  "depreciation"  usually  attached  only  to 
the  value  expiration  of  fixed  assets?  Contrast  sharply  the  valua- 
tion of  fixed  and  current  items. 

2. 

"Depreciation  is  simply  one  phase  of  the  valuation  problem 
as  it  arises  in  accounting." 

Discuss.  Argue  that  the  depreciation  problem  is  perhaps  the 
most  important  as  well  as  the  most  complex  matter  of  valuation 
with  which  the  accountant  is  called  upon  to  deal. 

Repairs  and  Renewals 

3. 

"Every  property  unit  retired  from  service  must  be  replaced 
by  some  property  of  the  same  value  if  the  capital  investment  is 
to  remain  intact,"    Show  that  this  is  true. 

Does  the  maintenance  of  operating  efficiency  insure  the  in- 
tegrity of  the  investment f  Does  the  maintenance  of  investment 
in  dollars  and  cents  insure  the  maintenance  of  operating  scope 
and  efficiency? 


THE  DEPRECIATION  ACCOUNTS  231 

4. 

Is  the  cost  of  a  new  tire  for  the  car  m-aintenancef  A  new 
wheel?  A  new  top?  A  new  engine?  Is  the  cost  of  "tuning  up" 
the  engine,  cleaning  the  cylinders,  etc.,  a  repair?  Should  the  cost 
of  lubrication  be  charged  to  upkeep?  Of  gasoline?  Try  to 
frame  a  general  definition  for  the  term  niaintenance. 


What  are  the  principal  factors  operating  to  cause  a  fixed 
asset  to  depreciate?  Why  is  it  that  the  life  of  an  asset  cannot  us- 
ually be  prolonged  indefinitely  by  repairs  ? 

6. 

Although  it  is  customary  to  charge  maintenance  costs  directly 
to  expense  as  incurred  show  that  repair  costs  as  well  as  residual 
depreciation  really  become  an  expense  or  cost  of  sales  after  the 
actual  outlay?  Show  that  there  is  some  force  in  the  view  that 
total  depreciation  consists  in  the  sum  of  original  cost  plus  total 
maintenance  throughout  the  service  life  of  the  unit. 

7- 

Draw  up  a  list  of  maintenance  accounts  which  might  reason- 
ably be  used  by  a  firm  operating  an  interurban  truck  business. 

The  RepIvAcement  Policy 

8. 

What  is  meant  by  the  "replacement  policy"  of  dealing  with 
depreciation  ?  Under  what  conditions  is  such  a  policy  fairly  reas- 
onable? What  unreasonable  interpretation  of  this  policy  has 
sometimes  been  followed  ? 


232  ■         PROBLEMS  AND  BXERCISES 

9- 

"Depreciation  should,  of  course,  be  apportioned.  To  charge 
the  entire  cost  of  an  item  to  expense  at  the  time  of  abandonment, 
however,  is  a  less  serious  mistake  than  to  seize  upon  acquisition 
as  the  occasion  for  this  charge."    Explain. 

ID. 

In  1916  a  corporation  purchased  10  new  machines  at  a  cost  of 
$25,000  to  replace  the  same  number  of  like  machines  the  original 
cost  of  which  was  $15,000.  The  following  entries  were  made  to 
cover  the  depreciation  involved  according  to  the  replacement 
policy : 

Expense  $25,000 

Cash   $25,000. 

Criticize. 

Suppose  that  the  new  machines  mentioned  in  the  last  problem 
had  cost  but  $10,000.     What  entries  should  have  been  made? 

II. 

A  water  plant  is  built  by  a  public-utility  corporation  at  a 
cost  of  $700,000.  It  is  estimated  that  the  plant  and  mains  will 
give  satisfactory  service  for  a  period  of  25  years,  after  which  it 
will  be  necessary  virtually  to  rebuild  the  property.  The  com- 
pany proposes  to  adopt  the  replacement  policy  of  treating  depre- 
ciation. Would  you  approve  of  the  company's  plan  ?  State  care- 
fully the  exact  conditions  necessary  if  the  replacement  policy  is  to 
be  an  adequate  method  of  caring  for  depreciation. 

12. 

The  Interstate  Commerce  Commission's  classification  of  oper^ 
ating  expenses  for  steam  roads  requires  a  railroad  company  to 
charge  to  renewal  expense  the  cost  of  replacing  a  property  item 
such  as  rails  or  ties  in  kind  minus  any  salvage  value  at  the  date  of 
replacement.  Explain  the  effect  of  this  rule  on  both  the  property 
and  the  expense  accounts. 


THE  DEPRECIATION  ACCOUNTS  233 

Formal,  Depreciation  Accounts 

13. 

"A  rational  net  revenue  figure  cannot  be  determined  until  the 
depreciation  of  important  property  items  of  long  life  has  been  rec- 
ognized by  an  appropriate  charge  to  expense." 

Support  this  statement  and  give  illustrative  entries. 

14. 

"The  charge  to  depreciation  expense  is  a  formal  recognition 
of  the  fact  that  a  part  of  the  investment  in  fixed  assets  has  been 
converted  into  current  assets,  and  insures  the  retention  of  these 
new  values  within  the  business." 

Show  precisely  how  the  formal  recognition  of  depreciation 
does  register  the  conversion  of  property  and  prevent  the  dissipa- 
tion of  capital.  Show  that  any  expense  charge  tends  to  insure 
capital  maintenance. 

15- 

Among  other  accounts  in  a  corporation's  ledger  you  find  the 
following : 

Building    $100,000 

Machinery   250,000 

Allowance  for  Depreciation  of  Build- 
ing        10.000 

Allowance  for  Depreciation  of  Ma- 
chinery       52,000 

(a)  On  which  side  of  the  ledger  would  each  of  the  above 
balances  be  found  ? 

(b)  Interpret  each  of  these  accounts. 

16. 

On  examining  the  books  of  a  manufacturing  company,  you 
find  that  the  balance  of  the  Machinery  account  is  $150,000  and 
of  the  Allowance  for  Depreciation  of  Machinery  account,  $55,- 
000.     A  conservative  appraisal  of  the  machinery'  shows  a  value 


23  \.  PROBLEMS  AND  EXERCISES 

of  $105,000.  Would  you  advise  the  correction  of  the  books  to 
conform  to  the  appraisals?  If  so,  give  the  entries  necessary  to 
make  the  correction. 

17. 

On  the  books  of  an  electric  light  company  you  find  these  ac- 
counts : 

Generating  Plant $575,000 

Reserve  for  Depreciation  of   Gener- 
ating Plant   $385,000. 

The  company  has  decided  to  abandon  its  old  plant  and  build  a 
new  one.  The  old  plant  is  scrapped  and  sold.  The  salvage 
yields  $50,000  in  all. 

(a)  Give  the  entries  necessary  to  close  the  old  plant  ac- 
count. 

(b)  If  the  salvage  had  been  $190,000  what  would  the  en- 
tries have  been? 

(c)  Suppose  the  salvage  were  $215,000  what  entries  should 
be  made? 

18. 

A  company  which  has  consistently  charged  excessive  sums  to 
depreciation  each  year,  finds  in  19 16  that  its  net  income  is  not 
large  enough  to  pay  the  regular  dividend.  The  board  of  directors, 
after  finding  that  the  Allowance  for  Depreciation  was  larger  than 
necessary  to  measure  the  decrease  in  the  value  of  the  property, 
charged  this  account  and  credited  Net  Revenue  with  an  amount 
sufficient  to  pay  the  dividend. 

Discuss  the  propriety  of  this  accounting  procedure. 

19- 

(Forms  B  and  C) 
The  ledger  of  the  Wolverine  Electric  Co.  on  Dec.  31,  1917, 
shows  an  Equipment  account  with  a  debit  balance  of  $100,000; 
the  Allowance  for  Depreciation  of  Equipment  account  shows  a 
credit  balance  on  the  same  date  of  $10,000.  The  equipment  was 
purchased  on  Jan.  i,  1916.    All  of  the  units  are  identical  and  the 


THE  DEPRECIATION  ACCOUNTS 


235 


same  rate  of  depreciation  is  applicable  to  each.  There  have  been 
no  abandonments  up  to  this  time.  The  Company  closes  its  books 
every  6  months.  On  Sept.  30,  1918,  one  machine,  which  has  been 
badly  damaged  in  an  accident,  is  dismantled.  The  original  cost  of 
this  unit  was  $1,500.  The  salvage  is  sold  to  a  junk  dealer  for 
$100. 

Continuing  the  depreciation  policy  already  established  in  this 
case  give  the  journal  entries  covering  the  history  of  this  equip- 
ment from  Jan.  i,  191 7,  to  Dec.  31,  1918,  inclusive,  and  show  the 
two  accounts  named  above  as  they  would  appear  when  closed, 
Dec.  31,  1918. 

20. 

(Forms  B  and  C) 

The  Bland  &  Graves  Co.  buys  for  cash  10  like  units  of 
equipment  on  July  i,  1916,  at  $2,000  each.  The  management 
decides  to  use  a  depreciation  rate  of  10%  per  annum.  The  books 
are  closed  on  the  last  day  of  each  year.  On  June  30,  1917,  the 
Company  sells  one  unit  for  $1,900;  another  unit  is  sold  for 
$1,800,  Dec.  31,  1917;  a  third,  for  $2,200  on  July  i,  1918.  The 
remaining  7  units  are  scrapped  Dec.  31,  1920.  Costs  of  demoli- 
tion, consisting  of  labor  which  is  included  in  the  general  payroll, 
total  $100.  The  salvage  is  sold  for  cash,  $2,000,  with  the  excep- 
tion of  parts  with  an  estimated  value  of  $500  which  are  placed 
in  the  Company's  storeroom. 

Give  dated  journal  entries  covering  the  above,  explaining 
your  procedure  in  the  case  of  any  doubtful  points. 

The. Depreciation  Fund 

21. 

"Such  accounting  procedures  as  the  booking  of  accrued  de- 
preciation, the  accumulation  of  discount,  and  the  building  up  of  a 
sinking  fund  reserve,  consist  in  mere  bookkeeping  entries  which 
do  not  affect  the  assets  of  the  business  in  any  way.  Such  actions 
are  only  pen  scratches  and  of  no  practical  importance  unless  ac- 


236  PROBLEMS  AND  EXERCISES 

companied  by  the  setting  up  of  actual  funds  of  marketable  secur- 
ities or  other  liquid  assets." 

Discuss  this  statement  critically.  When  is  it  advisable  to  set 
up  a  special  depreciation  fund? 

22. 

The  Interstate  Commerce  Commission  requires  all  steam 
railroads  engaged  in  interstate  commerce  to  maintain  a  reserve 
for  depreciation  of  equipment.  On  examining  the  books  of  the 
X.  R.  R.  Co.  you  find  among  the  accounts  on  the  balance  sheet, 
the  following : 

Depreciation  Fund $125,000 

Reserve    for   Depreciation   of    Equip- 
ment     125,000 

Notes  Payable  (6% )    100,000 

You  find  that  the  depreciation  fund  consists  in  certificates  of  de- 
posit in  a  savings  bank  which  bear  only  4%,  and  that  the  Com- 
pany has  established  this  fund  intending  thereby  to  comply  with 
the  I.  C.  C.  regulations.  The  Company's  practice  is  the  result 
of  a  common  confusion  in  the  use  of  the  terms  "Depreciation 
Fund"  and  "Reserve  for  Depreciation."  Write  a  letter  to  this 
Company's  auditor  explaining  the  error  and  also  making  any  sug- 
gestion you  may  have  with  regard  to  the  use  of  the  fund. 

23- 

(Forms  B  and  C) 
The  following  accounts  appear  on  the  balance  sheet  of  the 
X  Manufacturing  Company  on  June  30,  1918: 

Depreciation  Fund $15,000 

Allowance  for  Depreciation 15,000 

Cash    500 

On  this  date  a  machine  which  cost  $5,000  is  scrapped  and  is  re- 
placed by  another  machine  v/hich  costs  $7,500.  The  salvage  from 
the  old  machine  brings  in  $150  cash. 

(a)  Give  the  entries  recognizing  the  abandonment  of  the 
old  machine. 


THE  DEPRECIATION  ACCOUNTS  237 

(b)  What  funds  are  available  for  the  purchase  of  the  new 
machine  ? 

(c)  Give  entries  covering  the  purchase  of  the  new  ma- 
chine. 

(d)  Show  the  condition  of  all  accounts  affected  by  the  en- 
tries made  in  (a)  and  (c). 

24. 

Show  that  the  title  "depreciation  fund"  is  really  a  misnomer 
and  suggest  a  more  appropriate  caption. 

Depreciation  Fund  Returned  to  Investors 

25- 

State  the  conditions  which  would  warrant  the  policy  of  re- 
turning the  depreciation  fund  to  the  investors  and  illustrate 
the  possible  methods  of  attaining  that  result. 

26. 

The  Petrol  Oil  Company  has  just  completed  its  first  year's 
operation.  An  estimate  of  the  cost  (before  removal)  of  the  crude 
oil  taken  from  the  wells  during  the  year  is  $10,000.  The  concern 
has  $500,000  in  capital  stock  outstanding.  The  cash  account 
shows  a  large  balance,  far  in  excess  of  any  immediate  needs. 
Write  out  a  statement  to  the  board  of  directors  explaining  three 
different  ways  in  which  an  amount  of  this  cash  equal  to  the  deple- 
tion charge  may  be  used.  Which,  in  your  opinion,  is  the  most  de- 
sirable procedure  from  the  standpoint  of  the  stockholders? 

27. 

A  man  who  owns  $100,000  of  stock  in  the  Wolverine  Iron 
Mines  Co.  dies,  leaving  the  principal  of  his  estate  to  his  son  but 
all  of  the  income  to  his  widow  throughout  her  life.  It  is  the 
practice  of  the  mining  company  to  ignore  depreciation  entirely. 
What  effect  will  this  practice  have  upon  the  relative  rights  of  the 


238  PROBLEMS  AND  EXERCISES 

two  parties  interested  in  this  estate  if  the  dividend  checks  are 
considered  as  net  income?  Explain  the  proper  method  of  hand- 
ling this  situation  on  the  books  of  the  mining  company  and  the 
stockholder. 


The  Policy  of  Reinvesting  the  Fund  in  the  Business 

28. 

"If  the  funds  reserved  by  depreciation  charges  are  invested 
in  extensions  the  management  will  ultimately  find  itself  in  the  un- 
fortunate position  of  being  obliged  to  borrow  in  order  to  replace 
the  original  structures  when  it  becomes  necessary  to  abandon 
them." 

Is  it  necessarily  "unfortunate"  to  be  obliged  to  raise  new 
capital  under  such  circumstances?    Discuss  fully. 

MiSCEELANEOUS 

29. 

"A  balance  sheet  may  show  either  a  Depreciation  Fund  ac- 
count or  an  Allowance  for  Depreciation  account ;  or  both  may  be 
present,  showing  equal  or  unequal  amounts  as  the  case  may  be; 
or  either  may  appear  in  any  amount  whatever, — and  yet  in  all 
these  cases  depreciation  may  have  been  adequately  accounted 
for." 

Explain  carefully. 

30. 

The  following  is  a  published  balance  sheet  of  the  A.  B.  Co. 
at  the  end  of  its  fifth  year  of  operation : 

Assets  Liabilities 

Real  Estate $100,000  Capital    Stock     (com- 

Buildings    150,000  mon    $250,000 

Machinery    170,000  Capital  Stock  (prefer- 

Notes  Receivable  ....     60,000         red)    250,000 


THE  DEPRECIATION  ACCOUNTS 


239 


Accounts  Receivable. .  19,000  Bonds   100,000 

Supplies    5,000  Accounts  Payable  ....  20,000 

Merchandise 90,000  Surplus    20,000 

Cash    46,000 


$640,000  $640,000 

No  account  of  depreciation  has  been  taken.  Dividends  have  been 
declared  regularly  on  the  6%,  non-cumulative,  preferred  stock, 
but  nothing  has  been  paid  on  the  common.  The  accrued  depre- 
ciation on  buildings  and  machinery  amounts  to  $75,000. 

(a)  Restate  the  balance  sheet,  making  the  proper  correc- 
tions. 

(b)  Suppose  that  you  were  a  common  stockholder  in  this 
company,  would  you  have  reason  to  object  to  the  payment  of  the 
preferred  dividends?    Explain  fully. 

(c)  Suppose  that  the  Company's  real  estate  had  doubled 
in  value  during  the  past  5  years,  would  you  alter  your  position 
in  regard  to  the  actions  of  the  board  of  directors?  Restate  the 
balance  sheet  in  accordance  with  this  assumption,  carrying  the 
real  estate  at  its  proper  figure.  Should  appreciation  in  real  estate 
be  used  to  offset  depreciation  of  other  assets? 

31. 

A  certain  public-utility  company,  in  petitioning  for  an  in- 
crease in  rates,  placed  among  its  operating  expenses  the  following 
items : 

(a)  Ordinary  operating  expenses  (e.  g.,  labor  and  mater- 
ials). 

(b)  Depreciation  of  fixed  assets. 

(c)  Sinking  Fund  installments  on  its  bonded  indebtedness. 
The  statistician  for  the  public-utility  commission  objected  to 

the  company's  stand,  claiming  that  depreciation  and  sinking  fund 
were  synonymous  terms,  and  that  if  both  were  allowed  the  public 


240  PROBLEMS  AND  EXERCISES 

would  be  compelled  to  maintain  the  property  and  to  purchase  it 
besides. 

To  what  extent  was  the  statistician  correct?  Just  why  should 
the  terms  "sinking  fund"  and  ''depreciation"  be  so  confused? 

32. 

A  corporation  which  has  income  bonds  among  other  secur- 
ities outstanding,  has  been  unable  to  pay  interest  on  these  bonds 
for  five  years.  An  appraisal  of  the  property  shows  that  the  act- 
ual value  is  much  greater  than  the  book  figures  due  to  the  fact 
that  the  annual  allowance  for  depreciation  has  been  excessive. 
The  board  of  directors  decide  to  correct  the  book  figures  by  credit- 
ing the  difference  to  Surplus.  They  then  propose  to  pay  a  divid- 
end out  of  the  accumulated  Surplus.  The  income  bond  holders 
bring  suit  seeking  to  compel  the  payment  of  the  back  inter- 
est before  dividends  can  be  declared. 

Have  they  any  reasonable  ground  for  action? 

33. 

A  corporation's  balance  sheet  shows  the  following  items  on 
the  credit  side: 

Reserve  for  Depreciation   $170,000 

Reserve  for  Additions  and  Betterments  215,000 

Contingency  Reserve   175,000 

Reserve  for  Uncollectible  Accounts..      15,000 
Reserve  for  Federal  Taxes 60,000. 

Interpret  each  of  these  items. 

34. 

The  management  requests  that  you  certify  to  the  statement: 
Surplus  and  Reserves  $635,000,  in  place  of  the  itemized  accounts 
shown  in  the  last  problem.  Would  you  agree  to  this  procedure? 
Give  reasons. 


XXIII 
METHODS  OF  MEASURING  DEPRECIATION 

The  Basis  for  Measurement 


Contrast  physical  condition  or  efficiency  and  depreciated 
value. 

2. 

"No  piece  of  machinery  can  depreciate  below  say  thirty 
per  cent  of  its  cost  new.  There  is  a  point  below  which  it  is  prac- 
tically impossible  to  operate  a  machine  and  this  is  seldom  less 
than  seventy  per  cent.  Hence  any  attempt  to  place  a  valuation 
on  a  property  of  less  than  seventy  per  cent  of  cost  is  absurd." 
Write  a  statement  showing  the  confusion  of  terms  involved  in 
the  quotation.  Show  by  the  use  of  graphs  that  it  is  entirely 
logical  to  place  a  value  below  seventy  per  cent  at  the  same  time 
that  the  operating  efficiency  is  above  that  figure. 

3- 

"Productive  efficiency  figures  as  obtained  by  engineers  are 
an  important  element  in  the  determination  of  accrued  deprecia- 
tion, although  they  cannot  be  directly  applied  to  costs  in  determin- 
ing current  book  values." 

How  may  operating  and  efficiency  data  be  used  in  this  con- 
nection ? 

4. 

It  is  sometimes  urged  that  depreciation  should  be  charged 
roughly  as  a  function  of  gross  revenue  in  order  to  maintain  a 
fairly  even  flow  of  net  revenue.  Discuss.  Is  it  the  purpose  of 
accounting  to  equalize  the  showing  of  net  revenue  between  per- 
iods? 


342 


PROBLEMS  AND  EXERCISES 


5- 

"A  machine  may  be  looked  upon  as  a  bundle  of  services, 
from  the  standpoint  of  accounting.  A  company  buys  a  machine 
to  obtain  the  services  it  will  produce.  Hence  the  investment  is 
simply  the  cost  of  all  the  services  to  be  obtained.  This  being  the 
case  depreciation  should  be  apportioned  between  accounting  per- 
iods in  direct  proportion  to  the  number  of  services  rendered  by 
the  machine." 

This  view  is  often  used  as  an  argument  in  favor  of  charging 
depreciation  as  a  function  of  revenue.    Discuss. 

Straight  Line  Method 


What  assumption  underlies  the  straight  line  method?  Do 
you  think  this  assumption  reasonable? 

7. 

A  manufacturing  concern  purchases  a  machine  at  a  cost 
of  $TO,ooo.  It  is  estimated  that  the  machine  will  last  ten  years 
and  that  the  salvage  value  will  amount  to  $100.  Prepare  a  table 
showing  the  annual  depreciation  charges  on  the  straight  line 
method. 

8. 

Suppose  that  a  depreciation  fund  is  maintained  (Problem  7), 
that  the  annual  installment  is  the  amount  of  the  depreciation 
charge,  and  that  the  interest  earned  on  this  fund  amounts  to  6% 
convertible  annually.  Prepare  a  table  showing  the  amount  to 
which  the  fund  will  accumulate. 

9. 

"Interest   computations   should  be   taken   into   consideration 
whether  a  special  fund  is  maintained  or  not." 
Explain  why  this  is  true. 


MEASURING  DEPRECIATION  243 

10. 

Would  you  modify  the  statement  made  in  Problem  9  if  the 
service  life  of  the  property  item  under  consideration  was  a  very 
uncertain  element?  What  is  the  point  to  be  made  in  this  con- 
nection ? 

The  Sinking  Fund  Method 

II. 

How  is  the  total  depreciation  apportioned  to  accounting  per- 
iods according  to  the  sinking  fund  method  ? 

12. 

Prepare  a  table  showing  the  depreciation  charges  by  years 
according  to  the  sinking  fund  method  for  the  machine  men- 
tioned in  Problem  7.  Assume  that  the  sinking  fund  will  earn 
6%  convertible  annually.  Give  all  entries  for  the  first  three 
years. 

13. 

"The  sinking  fund  method  is  a  less  expensive  method  of 
accounting  for  depreciation  than  the  straight  line  method."  Show 
what  the  author  of  this  quotation  had  in  mind  and  criticize  his 
conclusion. 

14. 

Under  what  conditions  in  practice  is  the  sinking  fund  method 
advisable? 

The  Compound  Interest  Method 

15. 

Prepare  a  table  similar  to  the  one  in  Problem  7,  this  time  us- 
ing the  compound  interest  method  with  a  6%  rate  of  interest. 
Give  entries  for  first  two  years. 


244  PROBLEMS  AND  EXERCISES 

i6. 

What  is  the  essential  difference  between  the  sinking  fund 
and  the  compound  interest  methods? 

17- 

Show  why  the  original  name  "equal  annual  payment"  method 
was  a  proper  designation  as  applied  to  the  compound  interest 
method. 

1 8. 

Show  that  interest  is  not  being  charged  as  an  expense  when 
the  compound  interest  method  is  used. 

Present  Value  oe  Future  Revenue  Method 

19. 

Why  is  the  present  value  of  future  revenue  method  applic- 
able only  to  intangible  assets? 

20. 

You  are  asked  to  appraise  a  patent  right  by  a  firm  which  is 
contemplating  its  purchase.  Upon  investigation  you  find  that  it 
gives  an  advantage  over  all  competitors  sufficient  to  bring  in 
$1,000  per  year  for  10  years.  If  the  rate  of  interest  on  the 
investment  which  is  considered  reasonable  is  6%  what  value 
would  you  place  on  the  patent? 

21. 

Prepare  a  table  (Problem  20)  showing  the  value  for  each 
year,  the  depreciation  charge,  and  the  rate  of  net  revenue  to 
book  value  for  each  year,  using  the  present  value  of  future  reve- 
nue method  with  a  6%  rate  of  interest. 

22. 

An  intangible  property  item  which  will  produce  the  following 
revenues  before  allowances  for  depreciation  are  made  is  placed 
upon  the  market: 


MEASURING  DEPRECIATION  245 

Year  Revenue 

1  $100 

2  no 

3  90 

4  150 

5  20 

6  50 

7  120 

8  140 

9  150 
10  100 

(a)  What  would  you  bid  for  this  property  if  your  money 
was  worth  6%  ? 

(b)  Prepare  a  table  showing  the  depreciation,  and  the  rate 
of  net  revenue  to  book  value  for  each  year,  using  the  present 
value  of  future  revenue  method. 

23. 

A  bond  is  purchased  for  investment  at  $1,120  (par  value 
$1,000).  The  $120  represents  a  property  investment  which  will 
completely  expire  in  the  life  of  the  bond.  What  method  of 
writing  off  depreciation  would  you  use? 

24. 

"The  present-value-of-future-revenue  method  is  based  on 
the  same  principle  as  the  amortization  of  premium  on  bonds." 
Would  you  agree  with  this  quotation?  Explain  your  answer 
fully. 

25. 

The  X.  Y.  Realty  Co.  purchases  a  leasehold  on  an  office 
building  site.  The  lease  extends  for  15  years  and  will  bring  in 
an  annual  rental  of  $2,000.  The  purchase  is  made  on  a  5%  basis. 
Prepare  a  table  showing  the  amount  of  depreciation  on  tlie  lease- 
hold for  each  year. 


246  PROBLEMS  AND  EXERCISES 

Miscellaneous  Methods 

26. 

Give  the  argument  in  support  of  the  theory  that  mainte- 
nance and  residual  depreciation  should  be  amalgamated  and 
spread  over  the  life  of  a  property  through  the  "depreciation" 
charges. 

27. 

Write  out  the  argument  which  might  be  used  by  a  public- 
utility  in  support  of  the  practice  of  charging  depreciation  as  a 
function  of  net  revenue. 

28. 

"The  railroads  do  account  for  a  large  part  of  their  deprecia- 
tion as  a  function  of  net  revenue  at  present.  This  is  made 
possible  by  the  fact  that  the  Interstate  Commerce  Commission 
allows  all  repair  costs  to  be  charged  to  expense  in  the  year 
made."  Explain  how  this  may  result  in  charging  depreciation 
as  a  function  of  revenue. 
t    r;  29. 

Compare  the  annuity  and  sinking  fund  methods.  Show  that, 
in  a  sense,  all  "interest"  methods  of  spreading  depreciation  are 
essentially  the  same. 

30. 

Formulate  a  general  statement  setting  forth  the  conditions 
under  which  each,  respectively,  of  the  several  methods  mentioned 
in  this  chapter  would  be  advisable  in  practice. 


XXIV 

THE  INTANGIBLE  ASSETS 

The  Nature  of  Goodwill 


What  are  the  conditions  under  which  intangibles  of  the 
general  nature  of  goodwill  arise?  Name  the  more  important 
factors  which  would  give  rise  to  goodwill  in  the  case  of  a  rail- 
road enterprise,  a  retail  establishment,  and  a  manufacturing  en- 
terprise, respectively. 

2. 

Under  what  conditions  is  goodwill  transferable?  Not  trans- 
ferable? Does  the  matter  of  transferability  affect  the  value  of 
goodwill  for  accounting  purposes? 

3. 

How  may  the  "normal"'  rate  of  return  in  an  industry  be  as- 
certained ?    What  has  this  to  do  with  goodwill  ? 

The  Valuation  of  Goodwill 

4. 

State  carefully  the  circumstances  under  which  it  is  proper 
to  make  use  of  goodwill  in  the  accounts.  Describe  the  conditions 
which,  in  practice,  commonly  lead  to  the  recognition  of  goodwill. 

5. 

You  are  asked  to  certify  to  the  following  balance  sheet  head- 
ing: 

Real  Estate,  Buildings,  Goodwill,  etc.,  $2,500,000.  Have 
you  any  objection? 


248  PROBLEMS  AND  EXERCISES 

6. 

Discuss  the  importance  of  recording  goodwill:  (a)  when  a 
firm  pays  cash  or  an  equivalent  for  this  asset;  and  (b)  when  the 
asset  originates  without  cost. 

7- 

"If  goodwill  and  similar  assets  are  generally  recognized  in 
the  accounts  it  simply  means  that  the  rate  of  net  revenue  to  the 
value  of  the  assets  is  made  the  same  for  all  enterprises  in  each 
particular  line.  Neither  total  net  revenue  nor  any  other  im- 
portant figure  is  affected  by  this  procedure." 

Discuss. 

8. 

"Goodwill  is  just  as  valid  as  is  real  estate  or  merchandise. 
Hence,  if  it  is  proper  to  recognize  the  bona  fide  appreciation  of 
real  estate  or  merchandise  in  the  accounts  it  is  also  proper  to 
recognize  the  appreciation  of  goodwill." 

Do  you  agree  ?    Explain  fully. 

9- 

You  are  considering  the  purchase  of  a  retail  store  in  a  cer- 
tain town.  The  business  has  been  operating  for  two  years,  and 
during  that  time  a  net  return  on  the  investment  ($io,ooo)  of  ap- 
proximately 50%  has  been  realized  annually.  Is  there  any  good- 
will? State  carefully  just  what  facts  you  will  attempt  to  ascer- 
tain and  what  considerations  you  will  weigh  in  attempting  to 
answer  the  above  question  and  in  preparing  a  bid  for  the  enter- 
prise. 

Going  Value 

10. 

Explain  fully  what  is  meant  by  going  value.  Argue  that 
going  value  is  not  a  proper  matter  for  accounting  record  in  the 
case  of  the  competitive  enterprise.  Show  that  in  the  case  of  a 
"guaranteed"  industry  going  value  may  be  a  significant  intangible 
asset. 


THE  IN  TANGIBLE  ASSE  TS  249 

II. 

(a)  Discuss  developmental  value  as  a  matter  of  account- 
ing record. 

(b)  A  power  company,  \vith  a  proprietary  investment  of  $6,- 
500,000,  makes  a  very  poor  showing  of  net  revenue  for  5  years. 
This  result  is  due  in  part  to  inefficient  operating  management,  un- 
wise experimentation  and  advertising,  and  the  necessity  for  scrap- 
ping machinery  due  to  rapid  technical  improvement. 

A  summary  of  operation  for  five  years  is  as  follows: 

Gross  Revenue    Expense      Interest 

1905    $1,200,000    $1,050,000     $250,000 

1906  1,305,000  1,325,000  250,000 

1907  1,000,000  1,120,000  200,000 

1908  1,680,000  1,250,000  200,000 

1909  2,100,000  1,750,000  200,000 

Assuming  the  legitimacy  of  developmental  value,  compute  the 
amount  of  this  item  at  6%.  At  8%.  (Compound  annually  in 
each  case.) 

(c)  In  December,  1906,  we  will  assume  that  the  capitaliza- 
tion of  the  company  discussed  in  (b)  was  changed.  A  large  group 
of  bondholders  were  induced  to  accept  preferred  stock  in  the  com- 
pany in  exchange  for  their  bonds  rather  than  force  a  receiver- 
ship. This  reduced  the  fixed  charges  by  $50,000.  Does  this  reor- 
ganization affect  the  computation  of  developmental  value? 

12. 

In  case  going  value  is  assumed  to  be  a  legitimate  asset  item 
for  a  public  utility  company's  balance  sheet  would  it  be  proper  to 
adopt  the  cost  of  replacement  basis  for  the  valuation  of  tangible 
property?  Just  what  is  the  relationship  between  the  recognition 
of  going  value  and  the  basis  for  the  valuation  of  tangible  assets? 
Is  the  recognition  of  "interest"  during  construction,  capitalized 
early  losses,  and  capitalized  deficiences  in  return,  as  assets,  the 
rational  way  to  "guarantee"'  an  industry?     Explain  fully. 


250  PROBLEMS  AND  EXERCISES 

MiscELivANEous  Intangibles 

13. 

A  mining  enterprise  has  a  mining  property  which  will  last 
20  years  and  yield  an  annual  income  during  that  period  of  $200,- 
000.    At  8%  what  is  the  value  of  the  mine? 

Suppose  the  above  company  has  the  opportunity  to  pur- 
chase water  rights  which  will  lower  the  costs  of  smelting  20%,  and 
make  possible  a  return  of  $300,000  per  year;  and  that  these 
rights  are  secured  at  the  nominal  price  of  $15,000  (there  being  no 
competing  buyers).  At  what  figure  should  this  asset  be  car- 
ried on  the  books  ?  Explain  fully. 

14. 

Suppose  that  the  mining  property  (preceding  problem)  were 
practically  worthless  without  the  water  rights,  but  that  with  the 
rights  and  mine  in  conjunction  it  would  be  possible  to  realize  a 
net  revenue  of  $300,000  per  year  for  20  years.  What  is  the  max- 
imum amount  the  corporation  could  then  afford  to  pay  for  these 
rights?  Suppose  these  concessions  are  purchased  as  in  the  pre- 
ceding case  for  $15,000.  At  what  value  should  they  appear  upon 
the  books?  What  value  will  you  place  upon  the  actual  mining 
property  ? 

Draw  a  general  conclusion  as  to  the  relation  between  tang- 
ible and  intangible  assets. 

15. 

The  common  stock  of  the  Wagner  Machine  Co.  has  earned 
15%  annually  for  20  years.  There  is  every  prospect  that  this 
rate  of  return  will  be  maintained  permanently,  or  at  least  for 
many  years.  The  par  of  the  stock  is  $10.  If  you  require  S% 
on  your  money  what  will  you  give  for  a  block  of  100  shares? 


THE  INTANGIBLE  ASSETS  251 

16. 

If  it  were  possible  to  impute  a  certain  amount  of  periodic  net 
income  to  a  right  granted  by  governmental  authority,  such  as  a 
patent,  trade  mark,  or  copyright,  would  it  be  reasonable  to  main- 
tain a  value  in  the  books  based  upon  a  nominal  cost  figure? 
W'ould  sale  or  market  value  be  a  proper  basis  in  such  a  case? 
How  do  such  intangibles  differ  from  ordinary  goodwill? 

17. 

Some  corporations  list  patents  and  trademarks  in  their  bal- 
ance sheets  at  the  nominal  figure  of  one  dollar.  What  is  the  rea- 
son for  this  practice?  Is  it  justified?  How  would  you  expect 
excess-profits  taxation  to  influence  the  valuation  of  these  in- 
tangibles ? 

18. 

"Contractual  rights,  such  as  leaseholds,  annuities,  etc.,  for 
which  a  definite  consideration  is  given  and  from  which  the  income 
is  definitely  known  in  advance,  furnish  less  difficult  problems  of 
analysis  than  the  more  general  intangibles  such  as  goodwill." 

Show  that  this  is  true.    Illustrate. 

19. 

A  chemical  manufacturing  company  installs  an  experiment- 
al laborator}'.  The  cost  of  equipping  the  laborator}^  and  of  con- 
structing the  necessary  special  apparatus  is  given  to  you  as  fol- 
lows. 

Fixtures    $  2,cxx> 

Materials    6,500 

Salaries    12,000 

Power,  Heat  and  Light 2,500 

Rent    700 

$23,700 


252  PROBLEMS  AND  EXERCISES 

You  find  that  the  last  two  items  are  supplied  by  the  company 
itself;  that  is,  power,  heat  and  light  are  furnished  from  the  com- 
pany's main  power  plant ;  and  that  the  rent  charged  expresses  the 
amount  which  could  be  realized  if  this  space  were  rented  to  out- 
side parties. 

(a)  The  firm's  accountant  recommends  charging  the  cost  of 
this  laboratory  to  capital.  Give  your  opinion.  Do  you  need 
further  information? 

(b)  Assuming  that  the  accountant  is  right,  and  that  the 
maintenance  and  depreciation  charges  applicable  to  this  part  of 
the  building  total  $300,  what  is  the  value  of  the  laboratory?  Ex- 
plain fully. 


XXV 

THE  INCOME  SHEET 

Purposes  of  Income  Sheets 


For  what  purposes  are  income  sheets  prepared?  Describe 
briefly  the  kinds  of  information  desired  by  the  different  inter- 
ested parties. 

2. 

"The  art  of  expression  is  nearly,  if  not  fully,  as  essential  a 
part  of  the  accountant's  equipment  as  is  his  knowledge  of  account- 
ing principles."     Support  this  statement. 

Summary  Income  Sheets 

3- 

What  is  the  distinction  between  the  operating  and  net  reve- 
nue divisions  of  an  income  sheet?  Can  you  name  a  business 
whose  income  sheet  would  consist  of  accounts  appearing  ex- 
clusively in  either  division? 

4. 

What  important  information  would  be  shown  in  the  oper- 
ating division  of  the  income  sheet  for  a  water  plant ;  a  bank ;  a 
farm;  a  street  railway?  For  what  purpose  is  the  information 
appearing  in  this  division  intended? 

5. 

Make  an  outline  of  the  accounts  you  would  place  in  the 
operating  division  of  an  income  sheet  for  a  retail  store;  a  can- 
ning factory ;  a  wholesale  grocer. 


254 


PROBLEMS  AND  EXERCISES 


6. 

Outline  the  accounts  which  you  would  place  in  the  net  reve- 
nue division  of  an  income  sheet  for  a  bank;  an  automobile 
manufacturer;  a  shoe  store. 

7. 
In  which  division  would  you  place  the  item  "taxes"?  Explain 
carefully  the  nature  of  this  item. 

8. 

What  is  the  function  of  the  surplus  sheet?  How  extensive 
would  you  expect  it  to  be  for  a  retail  merchant ;  a  farmer ;  a  rail- 
road? Make  a  list  of  the  surplus  appropriations  which  might  be 
made  by  each  of  these  enterprises. 

9. 

What  is  meant  by  an  "operating  ratio  ?"'  Explain  how  it  may 
be  found  from  the  income  sheet  of  a  manufacturing  company,  a 
railroad,  a  retail  establishment. 

10. 
The  following  is  the  Profit  and  Loss  account  (in  condensed 
form)  of  the  Henderson  Company  for  the  year  1917  : 
Profit  and  Loss 

A^'ages  and  Salaries.  ..$    9,800     Balance $  12,500 

Supplies    13.300      Sales  95,ooo 

Sinking  Fund  Install.  .      10,000     Rebates     and     Allow- 

Depreciation  of  Plant.       8,900         ances 6,000 

iMaterials  Cost 28.000     Interest 300 

Interest  on  Bonds  ....       4,100     Dividends 400 

Dividends  Declared.  ..       2,000 
Loss  on  Aban.  Proper- 
ty         1,700 

General  Expense 11,600 

Balance 24,800 


$114,200  $114,200 


Balance    $  24,800 


THB  INCOME  SHEE  T  255 

Arrange  this  statement  in  more  intelligible  form.  What  fig- 
ure would  you  report  to  the  government,  as  an  auditor,  as  the 
net  proprietary  income?  What  figure  would  you  report  to  the 
manager  who  is  interested  in  comparing  the  concern  with  sim- 
ilar enterprises?     Explain. 

II. 

Is  the  following  an  income  sheet? 

Income  Sheet,  E.  W.  BHss  Co.,  for  the  year  ended  Dec. 
31,  1915,  Moody's  Manual,  1916,  page  2215. 

Net  Earnings $5,532,101 

Preferred  Dividends  (8%)   100,000 

$5,432,101 
Common  Dividends  (20%)    250,000 

Balance  after  Dividends $5,182,101 

Previous  Surplus  2,243,047 

Surplus  Jan.  i,  1916 $7,425,148 

The  Comparative  Income  Sheet 

12. 

Except  in  the  public  utility  field  it  is  at  present  very  difficult 
to  compare  the  income  statements  of  different  companies  engaged 
in  the  same  line  of  business.  Why  is  this  true  and  what  would 
remedy  the  situation? 

13. 

To  what  extent  may  a  comparative  income  sheet  be  used  in 
testing  managerial  efficiency  in  successive  accounting  periods? 
Explain  carefully. 


256  PROBLEMS  AND  EXERCISES 

14. 

The  following  is  a  comparative  income  sheet  for  the  Amer- 
ican Agricultural  Chemical  Co.  as  published  in  ^Moody's  ^Manual 
of  Railroads  and  Corporation  Securities,  1920,  Industrial  Section, 
page  28: 

Income  Account.  Years  Ended  June  30 

1919  1918  1917 

Profits     from     properties 

owned  and  controlled^.  .     $8,035,854  $11,079,957  $8,459,896 

Other  income 170,274  297,151  249,320 


Total   income    $8,206,128     $11,377,108     $8,709,216 

Less  reserve  for  freight  loss- 
es, etc 968,463 

Interest  on  mortgage  bonds.        404,001 

Interest  on  debenture  bonds        380.784 

Factor}'  and  mining  repairs 

and  depreciation 2,294,210 


Total   $4,047,458 

Balance 4,158.670 

Preferred  dividends  (6%)  .  .      1,659,896 

Common  dividends 1,813. 125  ( 

Bonus  to  employees 


976,594 

1,092,036 

431,466 

459,680 

444,939 

425,000 

1,413,090 

1,186,144 

$3,266,089 

$3,162,860 

8.111,019 

5,546,356 

1,658,487 

1,655,067 

01,059,777(41' 

^c)  875.468 

210.26-? 

Surplus  S   685,649         85,392.755         $2,805,558 

Criticize  the  arrangement  of  this  statement  and  state  in  nar- 
ative  form  the  information  you  are  able  to  obtain  from  it  as 
published. 


^  After  deducting  operating  charges  and  Federal  taxes  for  the  calen- 
dar years   1917  and   1018. 


THE  INCOME  SHEET  257 

On  page  44  of  Aloody  for  1920  (Industrial  Section)  may  be 
found  the  following  comparative  income  sheet  of  the  American 
Cyanamid  Co. : 

Income  Account,  Years  Ended  June  30. 

1918-19  1917-18 

Sales   $  6,273,226     $  6,234,237 

Less  allowance  and  freight     67,840  39i'569 

Net  sales  $  6,205,386  $  6,194,668 

Cost  of  sales 4,158,704  3,548,284 

Selling  and  general  expenses 473,640  301,148 

Interest,  taxes,  etc 176,650  72,248 

Net  profit  on  sales $  1,396,392     $  2,272,988 

Miscellaneous  profits 225,088  162,372 

Total  income $  1,621,480  $  2,435,360 

Preferred  Dividends  ^716,508  ^203,007 

Reserve  for  income,  etc.  taxes 175,000  570,000 

Deficit,  Amalgamated  Phosphate  Co.. .  .         163,753  29,975 

Licenses,  etc.  written  off 233,975  233,975 

Surplus  for  year  $      332,244     $  1,398,403 

Comment  on  the  arrangement  of  this  statement  and  state  in 
your  own  way  the  information  contained  therein. 


^  In  1917-18  this  figure  represents  deferred  dividends  to  December 
31,  1916,  paid  May  i,  1918;  in  1918-19,  deferred  dividends  to  December 
31,  1917,  $476,682,  paid  April  10,  1919,  and  deferred  dividends  to  June 
30,   1918,  $239,826,  paid  July   10,    1919. 


^H 


258  PROBLEMS  AND  EXERCISES 

16. 

How  would  you  present  the  information  contained  in  the  fol- 
lowing comparative  income  sheet  of  the  American  Hide  and 
Leather  Co.  (Taken  from  Moody's  Manual  for  1920,  page  53.) 

Income  Account  of  Company  and  Its  Subsidiaries, 
Years  Ended  June  30. 

<  1919  1918  1917 

Gross  output $28,593,698     $29,104,428     $24,076,824 

Expenses : 
Hides  and  skins  used,  etc. 
Manufacturing    s  u  pplies  p..  21,828,487       23,2:8,643       19,490,799 

V       and  expenses ''' 

Discounts 1,234,539         1,300,462  932,509 

General  and  selling  expenses 
and  taxes 1,847,530         i,o75,904  973.127 

Total  $24,910,556    $25,595,009    $21,396,435 

Trading  profits 3,683,142         3,509.419         2,680,389 

Miscellaneous  income 47)294  2,806  16,717 

Total  income $  3,730,436     $  3,512,225     $  2,697,106 

Deduct : 

Replacements,  renewals,  and 

repairs   $      313.865     $      304,968     $      234,786 

Bad  debts  and  reserve 28,172  45.000  4.512 

Interest  on  loans,  less  inter- 
est earned    (cr)    30,241  113,814  29,057 

^Interest   on    first    mortgage 

bonds   511.500  511.500  511.500 

Cost  of  150  bonds  for  sink- 
ing fund 151.656  151.330  154.500 

Total  deductions $  1,035,434    $  1,126,612    $     934,355 

Surplus  for  year 2.695,002         2,385,613         1,762.751 

'  Includes  interest  on  bonds  in  sinking  fund. 


THE  INCOME  SHEET 


259 


17. 

Reconstruct  the  following  comparative  income  sheet  of  the 
American  Ice  Co.  (Moody,  1920,  page  57.)  Indicate  those  class- 
ifications which  you  deem  entirely  improper . 

Consolidated  Income  Account,  Years  Ended  Oct.  31. 

1919  1918  1917 

Sales  of  ice,  etc $15,345,729     $12,622,867     $  9,840,529 

Income  from  investments, etc.         207,586  120,762  174,403 


Total  $15,553,315     $12,743,629     $10,014,932 

Less  cost  of  merchandise. 

Less  operating  expenses . .         10,440,079        9,080,806         7,404,764 


Balance  $  5,1 13,236     $  3.662,823     $  2,610,168 

Bond  interest,  etc 416,297  434,239  410,958 

Rents 364,160  126,289  146,367 

Taxes 201,146  242,495 

Insurance    99,281  88,947  86,903 

Maintenance    and    improve- 
ments          1,087,761  687,224  623,854 

Dissolution  exp.  —  Am.   Ice 

Sec.  Co 31,512 

Adjustment    of    property 

values 84,768 

Depreciation  of  general  prop- 
erty             761,677  750,780              

Reserve  for  Federal  taxes. .          359,828  164,904              


Total  $  3,089,004     $  2,453,529    $  1,626,857 

Net  gain 2,024,232         1,209,294  983,31 1 

Preferred  dividends  (%)   .  .   (6)  896,331    (6)    893,934  ^563,267 


Surplus  for  year  ....  $  1,127,901     $      315,360    $     420,044 


^  Includes    $4,623    paid    on    old    6%    cumulative    preferred    stock    and 
$558,644    (3M%)    on   present   preferred   stock. 


26o  PROBLEMS  AND  EXERCISES 

i8. 

Study  the  following  comparative  income  sheet,  state  in  narra- 
tive form  the  essential  facts  disclosed,  and  make  any  comments 
on  the  arrangement  that  occur  to  you : 

X  &  Bro.,  Inc. 
Profit  and  Loss  Statement  for  the  Years  Ending  Dec.  31. 

Sales:                                              ^916  1917  1918 

Gross $6,526,135  $6,537,498  $6,711,999 

Less: 

Returns,  Allowances 

Discounts  and  Rebates . .           9i,54i  121,481  146,815 

Net  Sales $6,434,594  $6,416,017  $6,565,184 

Cost  of  Sales: 

Materials 2,330.509  2,484,408  2,635,990 

Deduct :  Waste  Sold  .. .         124,228  212,826  277,002 

$  2,206,281  $  2,271,582  $  2,358,988 

Labor 1,944,129  1,928,521  1,806,578 

Boxes 198,196  21 1,835  190,151 

Revenue  Stamps 583,439  603,332  603,414 

Manufacturing  Expenses.          108,332  95,875  151, 557 

General  Expenses 105.720  122,111  114,262 

Depreciation  of  Bldgs.  . . .              7,690  7,694  8,136 
Depreciation  of  Mach., 

Fixt.,  and  Improv 21,386  18,998  19,268 

$  5. 175. 173  $  5,259.948  $  5,252.354 
Deduct :    Increase    or    Add 
(*)  Decrease  of  Inventory 
over  Inventory  at  Begin- 
ning of  Period *9i,672  262,001  *82,i53 

Total  Cost  of  Sales $  5,266,845  $  4-997,947  $  5,334-507 

Gross  Operating  Profit  ....  $  1,167,749  $  1,418,070  $  1,230,677 

Selling  Expense  $      225,643  $      253,905  $      308,402 


THE  INCOME  SHEET  261 

Administrative  and  General 

Expenses : 

Executive  Salaries 69,183             84,662             94-250 

Office  Salaries 70,142              78,225              87,032 

Rent  17,000              18,652              18,999 

Taxes 7.254             34,oi6             12,173 

Light,    Heat,    Telephone, 

Telegrams,  etc 66,542              53.023              57,886 

Bad  Debts 2,543                3,046               2,860 

Donations    948  1,243  

Depreciation  —  Office  and 

Store  Fixtures 4,256               3,156               3,320 

Organization    Expenses 

Written  Off 2,287               4.236               3,828 

Total  Expenses $  465.798    $     534.164    $     588,750 

Net  Operating  Profit $  701,951     $     883.906    $     641,927 

Miscellaneous    Income    and 

Credits  56,953             44,653              96,007 

$  758,904    $     928.559    $     737.934 
Deduct : 

Interest  on  Notes  Payable.  8,873              51.045 
Loss  on   Sale  of  Liberty 

Bonds 317 

$         8,873     $        51.362 

Net  Profit  before  Ded.  of 

Fed.  Taxes $  758,904    $     919,686    $     686,572 

Deduct :   Estimated   Federal 

Taxes 105,641            132,500 

Net  Profit $  758.904     $      814,045     $      554,072 


262  PROBLEMS  AND  EXERCISES 

19. 

The  following  comparative  statement  taken  from  the  books  of 
a  manufacturer  and  trader,  illustrates  a  type  of  summary  income 
sheet  prepared  by  many  companies.  Study  this  statement  and 
comment  on  any  strong  or  weak  features  which  you  consider 
noticeable. 

Comparative  Profit  and  Loss  Statements  for  Years 
Ending  Dec.  31. 

1916  1917  1918 

Sales $  1,082,936     $  1,238,052     $  1,469,283 

Cost  of  Goods  Sold 714,390  802,749  944,146 

Gross  Profits  on  Sales $     368,546  $     435,303  $     525.137 

Profit  on  Sale  of  Wood,  Ex- 
celsior and  Waste  Paper.  .              1,859  32  543 

Income  from  Investments i  623 

Other  Income 579  1.239  2,228 

Total  Gross  Income.  .  $      370,984    $      436,575     $      528,531 

Expenses  Chargeable  Direct 

to  Depts $      113.003     $      137,980    $      158,150 

Delivery,  Packing,  Stable 

and  Garage 38,193  45.266  54.6i2 

General  Expense,  Advertis- 
ing, Power,  Light,  Heat, 
Insurance,  Postage 103,463  121,285  125,677 

Interest    on     Mortgage     on 

Real  Estate 5.301  5,049  4,500 

Bldgs. :  Maintenance  and  Re- 
pairs    5.377  4,820  6,921 

Depreciation  on  Bldgs 6,610 

Depreciation  on  Machinery . .  795 


THE  INCOME  SHEET  263 

Donations 317  922  1,055 

Taxes :    Federal,    State   and 

City  2,524  19,657 

City  Taxes .   6,956 

Int.  on  Borrowed  Capital. .  .              5,94i  878  84 

Loss  on  Bad  Accounts  ....              1,232  1,698  5,oo9 
Loss    on    Adjustments    and 

Sale  of  Capital  Assets.  ..  .                  35  149  109 

Total  Expenses $      275,386     $  337,704  $      370,478 

Net  Profit $       95,598    $  98,871  $      158,053 

Some  Special  Forms  of  Income  Sheets 


20. 

On  page  49  of  the  Financial  World  for  July  11,  1921,  there 
appears  the  following  statement  of  the  affairs  of  the  Interborough 
Rapid  Transit  Co. : 

Interborough  Rapid  Transit  Company 

Growth  of  Traffic,  Revenues,  Costs,  Profits,  Charges, 
Dividends,   Fiscal   Years   Ending  June  30    (1921   esti- 
mated) Traffic  Growth,  Subways  Especially 

1921                 1920  1919 

Subways,  passengers  a  day.  .         1,750,000        1,601,361  1,263,417 

Manhattan  Ry.  (Elevated).          1,030,000        1,008,291  952,941 

Total,  for  year 1,018,000,000   955,133, no  809,335,658 

Revenues — Including  Miscellaneous 

Income  from  subways $35,300,000     $32,157,819  $25,127,152 

Manhattan  Ry.   (Elevated).     20,200,000       19,928,961  18,687,359 

Combined  Revenue $55,500,000     $52,086,780     $43,814,511 


264  PROBLEMS  AND  EXERCISES 

Operating  Costs,  Before  Fixed  Charges 

Operating  taxes,  deprecia- 
tion,    maintenance,     etc. : 

subways $21,800,000     $18,598,252  $15,260,074 

Manhattan  Ry.  (Elevated).     16,200,000       15,720,377  14,107,409 

Combined  costs $38,000,000    $34,318,629  $29,367,483 

Ratio :  Costs  to  Revenue 

Subways    61  %              57-9%  60.6% 

Manhattan  Ry.  (Elevated).               80%              78.670  754% 

Combined 68%              66.0%  66.9% 

Profits,  Before  Fixed  Charges 

Subway  profit $13,500,000     $13,559,566  $  9,867,078 

Manhattan  Ry.  (Elevated).       4,000,000         4,208,594  4,579,950 

Combined  profit $17,500,000     $17,768,160  $14,447,028 

Profit,  a  Passenger,  on  5c.  Fare 

On  subways 2.01c               2.31c  2.14c 

On  Manhattan  Ry 1.06                  1.14  1.32 

Combined  1.71c               i.86c  i.8oc 

Fixed  Charges,  on  Bonds,  Notes,  Rentals 

Against  subways $10,928,613  $  9,574,706 

Against  Manhattan  Ry 9,075,383  8,682,662 

Combined  charges   $21,500,000     $20,003,996  $18,257,368 

Itemized  charges. 

To  city,  for  subways 2,450,000        2,428,488  2,413,638 

"El"  rentals 4,235,000         4,235,000  4,235,000 

"El"  bond  guarantee  .  . 1,808,280         1,808,280  1,808,280 

IRT.  bond  charges $  9,253,91 1  $  8,354,381 

IRT.  note  interest 1,838.980  1,009,142 

Sundries,  rents,  etc 439,237  437,027 

Total  charges $21,500,000     $20,003,996  $18,257,368 


THE  INCOME  SHEET  '265 

Net  Profit,  After  Charges 

(Exclusive  of  "accruals"  or  guaranteed  returns  to  IRT.,  as  a 

first  lien  on  future  profits.) 

Subway  profits,  net $  2,630,953     $      292,372 

Manhattan  Ry 4,866,788^        4,102,71 1^ 

Combined  net  profit $  4,000,000    $  2,235,836^    $3,810,340^ 

Dividends  Paid  by  I.  R.  T.  Co, 
(Income  of  Interboro  Consolidated  Corporation,  in  which  public 

holds  stocks.) 

Dividend,  amount Nil  Nil  $    875,000 

Rate  on  IRT.  stock Nil  Nil  2y2% 

Discuss  this  report,  and  indicate  the  purposes  which  may  be 
served  by  such  a  statement. 

21. 
On  page  46  of  the  1920  report  of  the  American  Telephone 
and  Telegraph  Co.  the  following  statement  of  earnings  and  ex- 
penses appears : 

American  Telephone  and  Telegraph  Company 
Statement  of  Earnings  and  Expenses  for  the  Year  1920. 
Earnings :  1920 

Dividends    $     34,800,467 

Interest   12,969,756 

Telephone  Operation  Revenues 56,030,624 

Miscellaneous  Revenues 146,141 

Total    .$103,946,988 

Expenses   33,260.084 

Net  Earnings $  70,686,904 

Deduct  Interest    18.865,689 

Balance   $  51,821,215 

Deduct  Dividends    35-376,793 

Balance   $  16,444,422 

Appropriated  for  Contingencies   8,000,000 

Balance,  Added  to  Surplus   $     8,444,422 

'  Deficit. 


a66  PROBLEMS  AND  EXERCISES 

As  indicated  by  the  forms  of  income  received  what  is  the 
character  of  this  Company?  Discuss  the  arrangement  of  the 
statement  given. 

22. 

The  Goodrich  Rubber  Company  pubHshed  the  following  con- 
densed income  sheet  covering  its  operations  for  the  year  ended 
December  31,  1913: 

Net   Sales    $39,509,346 

Expenses    36,451,233 

Balance    $  3,058,113 

Miscellaneous  Income  491,316 

Total  Income    $  3,549,429 

Treasury  Stock  Reduced  from  Cost 

to  par  Value 168,417 

Depreciation    54i»359 

Interest  on  Bills  Payable 239,906 

Net  Profit   $  2,599,747 

Preferred    Dividends    2,100,000 

Common  Dividends  600,000 

Deficit  for  Year $      100,253 

Criticize  the  form  in  which  the  information  is  presented. 

23. 

(Form  B) 

The  following  income  sheet  was  published  by  the  X  Manu- 
facturing Company  for  the  year  ending  December  31,  1915 : 

Sales    $  1,000,000 

Goods  in  Process  (Dec.  31)   30,000 

Merchandise  on  hand  (Dec.  31)    100,000 

Raw  Materials  ( Dec.  31)  20,000 

$1,150,000 
Less  Selling  Expenses  250,000    $900,000 


THE  INCOME  SHEET  267 

Goods  in  Process  (Jan.  i)    20,000 

Merchandise  (Jan.  i)    80,000 

Raw  Materials  (Jan.  i)   15.000 

Materials  Purchased    i75.ooo 

Wages  Paid   320,000 

Wages  Due  and  Unpaid  (Dec.  31 ) 30,000 

Manufacturing  Expenses    200,000 

Cost  of  Manufacturing  840,000 

Net  Profit $  60,000 

Dividends  Declared    32,000 

Surplus  for  Year  $  28,000 

Rewrite  this  income  sheet  in  more  intelligible  form. 

24. 

(Form  B) 

The  Purdy  Water  Company  presented  the  following  income 
sheet  to  the  city  council  as  proof  of  its  statement  that  the  pre- 
sent rates  were  not  high  enough  to  produce  a  net  revenue : 
Revenue : 

Sale  of  Water $  45,ooo 

Sale  of  Miscellaneous  Pipe 5,ooo    $  50,000 

Expense : 

Operating    $  20,000 

Repairs    i»575 

Depreciation    15.250 

Interest  on  Bonds 8,500 

Sinking  Fund  Installment  10,000    $  55,325 

Net  Deficit    $     5.325 

Does  the  statement  submitted  substantiate  the  Company's  claim? 
Explain,  rewriting  the  statement. 


268  PROBLEMS  AND  EXERCISES 

25- 

A  company  furnished  the  following  income  sheet  to  its  in- 
come bondholders  as  explanation  of  the  fact  that  no  interest  had 
been  paid. 

Sales   $175,000 

Less  Decrease  in  Inventory 10,000     $165,000 

Expense : 

Materials    $  25,000 

Labor    70,000 

Fuel    13,000 

Depreciation 17,000 

Interest  (First  Mortgage)    15,000 

Sinking  Fund  (First  Mortgage)   8,000 

Discount  on  Preferred  Stock 18,000       166,000 

Net  Deficit  $     1,000 

The  total  interest  on  the  income  bonds  would  have  amounted 
to  $15,000.  Would  the  income  bondholders  have  a  basis  for  ac- 
tion to  compel  the  payment  of  the  interest  ?  Is  the  above  a  satis- 
factory exhibit  for  any  purpose? 

Further  Classification  of  Operating  Accounts 

26. 

What  purposes  may  be  ser\-ed  by  the  presentation  of  a  de- 
tailed operating  division  in  the  income  sheet?  . 

27. 

Prepare  a  report  on  a  classification  of  operating  accounts  for 
a  gas  plant.  Obtain  the  material  for  this  from  the  uniform  class- 
ification approved  by  the  public  utiHty  commission  of  some  one  of 
the  states. 


THE  INCOME  SHEET  269 

28. 

Study  the  following  income  sheet,  noting  carefully  the  prin- 
cipal classes  emphasized  in  the  operating  accounts.  Make  any 
comments  on  the  arrangement  which  occur  to  you. 

X  and  Y,  Inc. 
Profit  and  Loss  Statement  for  Year  Ended  Dec.  31,  1918. 

Sales $  21,137,369 

Less : 

Discounts  and  Allowance 445,919 

Merchandise  Returned  320,394 

$        766,313 

Net  Sales   $  20,371,056 

Expenses 
Cost  of  Sales : 

Materials,  etc $  11,170,139 

Operating  Expense  (including  wages)   5,060,202 

General  Expense 319,619 

Decrease  in  Inventory  of  Finished  or  Partly 

Finished  Goods  463,802 

]\Ianufacturing  Cost  of  Sales $  i7»oi3,762 

Gross  Profit  from  Manufacturing $     3'357,294 

Selling  Expense : 

Velvet  and  Plush  Departments $  I34,i53 

Carpet  Department    5^,796 

Mill  Expenses   218,930 

Men's  Wear  Department  32,749 

Dress    Goods    ^7,385 

Commission  Agents    76,296 

New  York  Office  Expense 2,730 

Reser\-e  for  Doubtful  Accounts 2,000 

Total  Selling  Expenses $        543,039 


2  70  PROBLEMS  AND  EXERCISES 

Profits  Before  Adjustments $  2,814,255 

Profits  on  Sale  of  Raw  Silk 12,060 

Profits  on  Sale  of  Dye  House  Supplies 2,007 

Net  Profit  from  Operating  of  Mills $  2,828,322 

Other  Income  1 10,449 

Total   ■ $  2,938,771 

Administrative  and  General  Expenses : 

Salaries  of  Officers   32,166 

Warehouse  Expenses  20,792 

OfBce  and  General  Expense 34,o88 

Contributions  to  War  Chest 15,000 

Insurance  and  Hauling 7,336 

State  and  Federal  Taxes 2,835 

Interest  on  Bills  Payable   106,197 

$  218,414 

Profit  before  Allowance  is  made  for  Est.  Fed.  Taxes. $  2,720,357 

Estimated  Fed.  Income  and  War  Exc.  Profits  Tax.  .  1,435,000 

Net  Profit $  1,285,357 

28. 

Study  the  following  income  sheet  carefully.     Can  you  sug- 
gest any  improvements  in  classifications  ? 

General  Manufacturing  and  Trading  Account, 
Year  Ended,  Dec.  31,  1918. 

Sales $  5.538,337 

Less:  Discounts 32,174 

Net  Sales $  5,506,163 

Transfers  to  Other  Departments 323,946 

Total    $  5,830,109 


THE  INCOME  SHEET  271 

Prime  Cost : 

Inventory  of  Raw  ^Material  and  in  Process  at  Be- 
ginning of  Period $  249,376 

Purchases,  including  Transfers  2,554,037 

Wages    389,628 

Total   ?  3,193,041 

Less :  Inventory  of  Raw  Material  and  in  Process  at 

End  of  Period 285,667 

Total  Prime  Cost • • $  2,907,374 

Factory  Burden: 

Rent 46,043 

Power,  Heat  and  Light 279,964 

Insurance    39,9^3 

Factory  Expense 62,273 

Taxes   ^''   ^ 

Depreciation  on  Bldgs,  Machinery,  and  Equipment. . .  122,446 

Total  Factory  Burden $  556,342 

Cost  of  Finished  Goods : 

Add  •  Inventory  of  Manufactured  Goods  at  Beginning 

of  Period   810-713 

Less :  Inventory  at  End  of  Period 773,667 

Difiference    $  37,046 

Total  Cost  of  Sales $  3,500.762 

Gross  Profit    $  2.329.347 

Selling  and  Administration : 

Branch  Office— Selling  Expense  $  423,597 

Covering  Contracts 462,489 

Branch  Office— Salaries   3i,424 

Branch  Office — Insurance  ^'535 


2J2 


PROBLEMS  AND  EXERCISES 


Branch  Office — Taxes 61,427 

Officers'  and  Office  Salaries 120,869 

General  Expense   33y7^^ 

Depreciation — Office  Furniture  and  Fixtures,  Branch 

Office 2,958 

Advertising    46,749 

Travehng  Expenses 9,708 

Reserve  for  Bad  Debts 39-5 16 

Shipping  Expense   35'562 

Total  Selling  and  Administration  Expense $  1,269,544 

Net  Profit  on  Operations $  1,059,803 

Revenue  Account  Analysis 
Credits 

Revenue  Stamps  Redeemed $  172 

Dividends    3,ooo 

Rents 307,228 

Interest    46,270 

Crude  Fibre  Sales 184,262 

Printing  Department 2,445 

General  Manufacturing  and  Trading  Profits 1,059,803 

Total  Credits   $  1,603,180 

Charges 

Bond  Expenses  and  Premium  Amortized $  25,447 

Printing  Department   1,500 

Garage 6,323 

Pulverizing  Department   3,825 

Worthless  Accounts  Written  Off 73,070 

Total   Charges    $  110,165 

Net  Gain  for  Year $  1,493,015 


THE  INCOME  SHEET  273 

Profit  and  Loss  Account  Analysis 
Credits 

Balance  at  Beginning  of  the  Year $  3,850,000 

Net  Profits  for  the  Year 1,493,015 

Total  Credits    $  5-343.0I5 

Charges 

U.  S.  Excess  Profits  Tax  (1917)  $  I53,77i 

Bond  Interest   48,916 

Preferred  Stock  Dividends    80,000 

Buildings  Razed,  ^Machinery  Scrapped 2,180 

Reserve  for  Depreciation,  Asbestos  Mine 3,820 

Total  Charges $  288,687 


Undivided  Profits  as  Shown  by  Balance  Sheet $     5,054,328 

30. 

Rewrite,  completely,  the  following  income  sheet,  bringing  to- 
gether as  far  as  you  can  important  classes  of  operating  accounts. 
Explain  any  doubtful  points. 

Profit  and  Loss  Statement,  Year  Ending  Dec.  31,  1918 
Gross  Sales,  less  Returns  and  Allowances.  $8,991,168 

Inventory,  Jan.   i,  1918   $1,720,398 

Cloth  and  Trimming  Purchases 3,576,464 

Labor  and  Wages,  Manufacturing 1,293,464 

Contract  Labor  Trim,  and  Exp 2,727,049 

Alanufacturing  Expenses   25,134 

$9,342,509 
Inventory,  Dec.  31,  1918 1.956,705       7,385,804 

$1,605,364 


274  PROBLEMS  AND  EXBRCISES 

Gross  income  from  operations  other 
than  Trading  or  Manufacture 

Discounts,  Cloth $  46,707 

Collection  of  Bad  Debts 7>i67 

Insurance  Recovery    5,677 

Discounts,  Expenses    3,968 

Anticipation  Purchases  6,899 

Discounts — Trimmings    53^084 

Allowances — Purchases   2,096 

Sundries    93          125,691 

Interest  on  U.  S.  Liberty  Bonds 5>392 

Interest  from  Other  Sources 3,8o8 

Rentals -  2,643 

Gross  Income   $1,742,898 

Expenses 

Wages    $  165,586 

Salesmen    220,693 

Advertising    214,666 

Sales  Discount 147,842 

Sales  Anticipation   1)995 

Office — Boston    606 

Office — Chicago    803 

Office — New  York 16,305 

General  Expense 19,100 

Special  Order  Dept.  Expense   22,133 

Packing    14,384 

Coal    25,328 

Insurance 19,114 

Freight,  Express,  Drayage,  Parcel  Post..  15,338 

Auto  Truck  Expense 9,259 

Rent   42,500 

Auditing    i  ,200 

Boiler  and  Engine  Expense i»879 

Collection  Expense 1,876 

Dues  and  Subscriptions 6,698 


THE  INCOME  SHEET 


375 


Medical    2,008 

Telephone  and  Telegraph 5-528 

Office  Supplies,  Print,  and  Sta 11,059 

Postage    7,552 

Paper  and  Twine 1,070 

Sundries 902 

Officers'   Salaries    132,753 

Supplies  and  Repairs 30,825 

iMaintenance,  Leased  Property 4,985 

Repairs — Outside  Properties  874 

Interest   83,538 

Taxes   2,967 

Bad  Debts 12,766 

Depreciation 21 ,794 

Amortization  of  War  Facilities 102,573       1-368,499 


Net  Profit $    374,399 

The  Consoudated  Income  Sheet 

On  pages  11  to  22  of  Moody's  Manual  of  Corporation  Se- 
curities for  1916  there  is  given  a  description  of  the  properties 
controlled  by  the  American  Gas  Company.  A  consolidated  in- 
come sheet  is  given  on  page  13  and  separate  income  sheets  of  the 
affiliated  companies  on  the  following  pages.  Study  these  state- 
ments carefully  and  write  a  report  on  the  form  and  content  of 
the  consolidated  income  sheet. 

32- 

Study  the  following  consolidated  income  account  of  the  Un- 
ited States  Steel  Corporation  as  published  in  Moody's  Manual  for 
1920,  page  1900,  and  write  a  narrative  statement  covering  the  sit- 
uation. 


276  PROBLEMS  AND  EXERCISES 

General  Account  of  the  United  States  Steel  Corp.  and  Its  Sub- 
sidiary Companies,  Years  Ended  Dec.  31. 

1919  1918 

Gross  sales  and  earnings $1,448,557,835     $1,744,312,163 

Mfg.  cost  and  operating  expense.  .$1,140,988,637  $1,178,032,666 
Admin.,  selling  and  gen.  exp.,  ex- 
cluding exps.  of  transp.  cos 31,632,076  29,786,576 

Taxes    81,594,337  297,645,048 

Com'l  discounts  and  interest 9,062,142  9,646,361 

Total  expenses   $1,263,277,192     $1,515,110,651 

Balance   $  185,280,643  $    229,201,512 

Miscl.  mfg.  etc.,  gains 2,840,639  3,402,410 

Rentals  received 323,282  255,568 

Federal  comp.  of  subsid.  RRs.,  est.  15,582,724  15,510,511 

Total  net  income $  204,027,288  $    248,370,001 

Proport'n  of  net  prof,  of  prop's. 

owned  whose  gro.  rev.  etc.  are 

not   included    381,795  349,192 

Int.  and  divs.  on  investments,  etc.  12,764,361  20,957,143 

^Profits  earned  by  Sub.  Cos 12,125,446            

Total  income $    229,298,890     $    269,676,336 

Sub.  Co.  interest  charges 8,701,577  8,930,424 

Balance   $    220,597,313     $    260,745,912 

^  Net  balance  of  profits  earned  by  subsidiary  companies  on  sales  made 
and  service  rendered  account  of  materials  on  hand  at  close  of  year  in 
purchasing  companies'  inventories  and  which  profits  had  not  been  realized 
in  cash  from  the  standpoint  of  a  combined  statement  of  all  companies  up 
to  close  of  year. 


THE  INCOME  SHEET  277 

%ess  profits  earned  by  Sub.  Cos 1,098,232 

Res.  ag'nst  high  cost  of  inventories        38,710,396  20,297,000 
Proportion  of  cost  of  war  facilities 

installed    38,297,854  40,000,000 

Net  earnings $    143,589,063     $    199,350,680 

33. 

On  page  36  of  the  1920  report  of  the  American  Telephone 
and  Telegraph  Co.  is  presented  a  consolidated  income  sheet  that 
appears  as  follows : 

Bell  System  Income  Statement  for  Year  Ending  Dec.  31,  1920. 
(Duplications  Excluded) 

Exchange  Revenues $301,282,599 

Toll  Revenue 141,883,485 

Miscellaneous  Revenues   6,276,031 

Total  Operating  Revenues $449,442,115 

Depreciation    $  65,731,071 

Current  Maintenance   69,665,080 

Traffic  Expenses 145,848,181 

Commercial  Expenses   45,075,272 

Gen.  and  Miscl.  Expenses 20,500,013 

Total  Operating  Expenses .   346,819,617 

Net  Operating  Revenues   $102,622,498 

Uncollectible  Revenues   $     1,208,798 

Taxes   27,841.334         29,050,132 

Operating  Income    $  73,572,366 

Non-operating  Revenues — Net    11,692.610 

Total  Gross  Income $  85,264,976 


*  Net  balance  of  profits  earned  by  subsidiary  companies  on  sales  made 
and  service  rendered  account  of  materials  which  were  on  hand  at  first  of 
year  in  purchasing  companies'  inventories  and  which  profits  have  since 
been  realized  in  cash  from  the  standpoint  of  a  combined  statement  of  the 
business  of  all  companies. 


278  PROBLEMS  AND  EXERCISES 

Rent  and  Miscellaneous  Deductions. .  .$  5,755,808 

Interest  Deductions   31,724,103         37,479,911 

Balance  Net  Income   $  47,785,065 

Deduct  Dividends    39»999>579 

Surplus  Earnings $     7,785,486 

Explain  the  difference  between  this  statement  and  the  one 
given  in  Problem  21  (which  is  for  the  same  period)  in  so  far  as 
you  can. 

34- 

For  statistical  purposes  it  is  often  necessary  that  statements 
of  revenue,  expenses,  and  net  earnings,  for  an  entire  industry,  be 
prepared.  Assuming  that  the  information  desired  were  available 
how  would  you  proceed  to  prepare  such  a  statement?  Show  that 
industrial  research  is  handicapped  by  the  lack  of  rigid  uniformity 
in  accounting  classifications  such  as  have  been  prescribed  for  the 
railroads  bv  the  Interstate  Commerce  Commission.     > 


XXVI 
THE  GENERAL  BALANCE  SHEET 

General,  Balance  Sheet  Captions 


Would  you  agree  with  the  following  statement  taken  from 
an  accounting  book?  "A  balance  sheet  can  only  be  an  approxima- 
tion to  facts,  the  degree  of  approximation  depending  upon  the 
skill  and  accuracy  with  which  the  estimates  are  made."  Explain 
what  you  consider  to  be  the  main  function  of  a  balance  sheet. 

2. 

What  important  comparisons  can  be  made  between  the  main 
groups  of  accounts  on  each  side  of  the  balance  sheet? 


A  corporation  endorsed  a  $10,000  promissory  note  for  a 
customer.  In  case  the  customer  should  be  unable  to  pay  the 
corporation  would  have  to  redeem  the  note  out  of  its  own  funds. 
How  would  you  advise  that  this  transaction  be  treated  with  re- 
spect to  the  balance  sheet? 

4- 

A  manufacturing  company  purchased  a  piece  of  real  estate 
for  $500,000.  The  company  paid  $250,000  in  cash  and  gave  a  first 
mortgage  for  the  balance.  The  real  estate  was  carried  on  the 
balance  sheet  at  $250,000,  and  no  mention  was  made  of  the  mort- 
gage.   Would  you  consider  this  proper?    Explain  fully. 


28o  PROBLEMS  AND  EXERCISES 

5. 

Rewrite  the  following  balance  sheet,  classifying  the  accounts 
on  each  side  into  important  subgroups  as  far  as  you  deem  this  to 
be  expedient.    Comment  on  any  doubtful  points. 

Balance  Sheet  as  at  Dec.  31,  1918. 

Real  Estate  and  Plant $  498,909 

Departmental  and  General  Business 

Equipment,  Less  Depreciation.  34.715 

]\Ierchandise    429,703 

Accounts  Receivable 184,476 

Notes  Receivable   3-777 

Cash  on  Hand  and  in  Banks 86.388 

Investments — Liberty  Bonds   22,700 

'  Departmental  and  General  Business 

Supplies   3,769 

Insurance  Premiums  Prepaid ^'77^ 

Capital  Stock  Tax  Prepaid 145 

Miscellaneous  Taxes  Prepaid 215 

Certified  Checks  Outstanding 600 

Interest  on  Bank  Deposit  Accrued.  .  208 

Interest  on  Investments  Accrued  . .  .  219 

Expense  Items  Paid  in  Advance  ....  156 

Aliscellaneous  Accrued  Items 150 

Deposit  on  Machine  Shop  Property.  250 

Total  Assets   $1,269,152 

Capital  Stock  (issued  and  paid  in)  .  .$  615,725 

Alortgages   Payable    90,000 

Accounts  Payable    78,689 

Notes  Payable  65.000 

J.  B.  Van  Fleet 35.000 

Deposits  Paid  on  Account  of  Mer- 
chandise Sales  Undelivered....  5-579 

Full  Paid  Sales  Undelivered 6,824 

Micellaneous  Credits  Unapplied....  804 


THE  BALANCE  SHEET  281 

U.  S.  Gov't.  Taxes  Accrued   (1918, 

estimated)    60,000 

Interest  on  Mortgages  Accrued      .  .  .  562 

Commissions  and  Bonuses  Accrued.  .  33, 112 

State  Corporation  Tax  Accrued  ....  357 

Salaries  and  Wages  Accrued i?503 

Surplus 1 17,944 

Net  Profit  for  Year 158,053 

Total  Liabilities  and  Capital. .  .$1,269,152 


Illustr.\tive  Balance  Sheets 

6. 
Rearrange  the  accounts  in  the  following  balance  sheet  in  a 
form  more  convenient  for  comparative  purposes : 

Assets 

Real  Estate $  125,000 

Cash   50,500 

Buildings   500,000 

Raw  Materials   170,000 

Finished  Goods    225,000 

Goodwill 250,000 

Consignments    50,000 

Equipment   125,000 

Unissued  Stock  Preferred 150,000 

Unissued  Stock  Common 137,225 

Notes  Receivable   75,ooo 

Accounts  Receivable   125,000 

Investments  (Stocks  and  Bonds)  .  . .  325,500 


$2,308,225 
Liabilities 

Capital  Stock  Preferred $    500,000 

Capital  Stock  Common 750,000 

Bonds   400,000 


282  PROBLEMS  AND  EXERCISES 

Notes  Payable    175,000 

Accounts  Payable    215,225 

Reserve  for  Depreciation 18,000 

Reserve  for  Uncollectible  Accounts.  20,000 

Reserve  for  Contingencies 5,ooo 

Surplus 225,000 

$2,308,225 
Give  your  opinion  as  to  the  financial  condition  of  this  concern. 

7. 

Suppose  that  you  have  access  to  the  following  additional 
information  with  regard  to  the  company  whose  balance  sheet  was 
given  in  the  last  problem.  The  Reserve  for  Depreciation  is  in- 
adequate to  care  for  the  decrease  in  property  value  by  $20,000. 
Finished  goods  were  inventoried  at  selling  price.  The  mark  up 
for  selling  expenses  and  profit  amounts  to  25%  of  selling  price. 
Restate  the  balance  sheet  in  the  light  of  these  facts. 

8. 

The  following  balance  sheet  was  published  by  the  X  Mining 
Company  for  December  31,  1916: 

Assets 

Property  Account    $28,755,434 

Equipment   1,194,708 

Stripping  Overburden 150,000 

Extraordinary  Repairs  75,ooo 

Prepaid  Royalties 85,907 

Inventory — Coal   1,335,862 

Accounts  Receivable   591,793 

Notes  Receivable  336,000 

Cash   503,822 

Reserve  Funds 282,559 

Company's  Bonds  in  Treasury 312,000 

Investment  Securities  161,000 

$33,784,085 


THB  BALANCE  SHEET  283 

Liabilities 

Common  Stock $15,030,000 

Preferred  Stock 12,600,000 

Bonds   2,440,000 

Accrued  Interest   24,006 

Accrued  Taxes 20,440 

Premium  on  Preferred  Stock 13,020 

Reserve  for  Depreciation  (Coal  Depl'n)  111,529 

Notes  Payable   83,402 

Accounts   Payable    40,040 

Accrued  Wages   45>523 

Reserve  for  Sinking  Fund 130,103 

Contingency   Reserve    106,060 

Surplus 3,169,962 


$33,784,085 
Place  the  accounts  in  proper  groups  and  write  out  your 
opinion  of  the  condition  of  this  corporation. 

9. 

General  Balance  Sheet,  Dierk's  Lumber  and  Coal  Company, 
Dec.  31,  1914.     Moody's  Manual,  1916,  p.  2519. 
General  Balance  Sheet, 
December  31 
Assets  1914  Liabilities  1914 

Real  Estate  and  Per-  Capital  Stock $2,697,000 

sonal  Property  ...$    320,579      Bonded  Debt 475,000 

Timber  and   Timber  Accounts    and    Bills 

Lands    2,557,095  Payable   359.974 

Saw  Mill  Plant 57,857      Profit  and  Loss 1,939,528 

Accounts    and    Bills 

Receivable    1,347,659 

Merchandise   251,572 

Stocks       in       Other 

Companies    875,372 

Cash    61.368 


Total    $5,471,502         Total    $5,471,502 


284  PROBLEMS  AND  EXERCISES 

Statement  of  Working  Capital, 
December  31 
Current  Assets  1914  Current  Liabilities        1914 

Accounts    and    Bills  Accounts    and    Bills 

Receivable    $1,347,619         Payable   $    359.974 

Merchandise   211,572 

Cash 61,368 


Total $1,660,599         Total    $   359,974 

Net  Working  Capital,  Dec.  31 $1,300,625 

Criticize  the  form  in  which  the  information  is  presented. 
Assuming  all  valuations  properly  made  what  is  +he  financial  con- 
dition of  this  concern? 

Classification  of  Asset  Accounts 

10. 

Explain  the  use  of  the  controlling  account  principle  as  applied 
to  fixed  property  accounts  or  merchandise  accounts.  What  is  a 
property  account  register? 

II. 
Draw  up  a  classification  of  fixed  asset  accounts  which  would 
meet  the  requirements  of  a  machine  tool  manufacturing  business. 
Prepare  a  list  of  controlling  accounts  for  the  current  assets  likely 
to  be  required  by  such  an  establishment. 

12. 

The  following  is  the  asset  side  of  a  manufacturing  com- 
pany's balance  sheet.  Rewrite  in  condensed  form,  suitable  for 
publication. 

Balance  Sheet,  Dec.  31,  1918. 
Assets 

Cash    $      85,875 

Trade  Accounts  and  Notes  Rec 313.871 

Other  Accounts  (Advanced  to  Sales- 
men for  Traveling  Expenses).  .  150 


THE  BALANCE  SHEET  285 

War  ^Material   106,012 

Work  in  Process 422,461 

Finished  Products   297,531 

Supplies  189,448 

U.  S.  Bonds — 1st  Loan 200 

U.  S.  Bonds — 2nd  Loan 25,000 

U.  S.  Bonds — 3rd  Loan 15,000 

U.  S.  Bonds — 4th  Loan 23,000 

Foreign  Bonds   500 

Stocks  (Domestic) 325 

Deferred  Charges  to  Future  Opera- 
tions      i3»o5i 

Land 74,127 

Buildings    375.987 

^Machinery   307, I79 

Tools  and  Minor  Equipment 54,436 

Delivery  Equipment 14-799 

Office  Furniture  8,653 

Power  Plant  and  Accessories 28,207 

Electric  ]\Iachiner^'  and  Appliances.  .  34.652 

Metal  Patterns    135.231 

Wood  Patterns 27,686 

Metal  Core  Boxes 5i,37o 

Wood  Core  Boxes 4,523 

Metal  Flasks  and  Wood  Flasks 6,336 

Wood  and  Miscl.  Shop  Patterns  ....  2.256 

Metal  Dryers 1,182 

Furnaces  and  Forges 42,318 

Plans  and  Drawings    9,618 

Laboratory  Equipment    2,767 

Fixtures.  Factory 61,341 

Fixtures,  Supply  Store 1,104 

Equipment  in  Process 5,i93 

$2,739,389 


286  PROBLEMS  AND  EXERCISES 

13- 

The  following  is  the  asset  side  of  a  shoe  manufacturer's 
balance  sheet.  Rewrite  in  summary  form,  using  only  the  follow- 
ing headings:  cash,  receivables,  inventories,  investments,  good- 
will, equipment,  and  deferred  charges. 

Balance  Sheet  as  at  Oct.  31,  1918. 

Assets 

Cash   $  5,045 

Accounts  Receivable   128,966 

Loans  to  Employees 663 

Machinery,  Tools,  and  Parts 17,716 

Lasts  and  Patterns 1 13,648 

Forms 2,018 

Clicking  Dies 658 

Furniture  and  Fixtures 21,429 

Upper  Leather 84,460 

Sole  Leather 60,188 

Findings 12,083 

Supplies    4.602 

Shoes  in  Process 147,758 

Finished  Goods 15,977 

Damaged  Shoes 125 

Returned  and  Rejected  Shoes 78 

Samples 1,656 

Liberty  Loan  Bonds 21,600 

United  Shoe  Mach.  Co.  Stock 1,478 

War  Savings  Stamps 100 

Advances  to  Salesmen 1,497 

Unexpired  Insurance 2,851 

Prepaid  Rent 1,234 

Life  Insurance   2,563 

Goodwill    50,000 

Total  Assets $  698,413 


THE  BALANCE  SHEET  287 

Miscellaneous  Problems,  Income  Sheet  and  General 
Balance   Sheet 


14. 

From  the  following  trial  balance  and  inventories  of  a  man- 
ufacturing company  prepare  a  working  sheet  and  classified  in- 
come and  balance  sheets. 

Trial  Balance  Dec.  51,  19 17. 

Real  Estate  $  25,000 

Raw  Material  (Jan.  i,  1917)   15,000 

Plant  and  Machinery 35,ooo 

Accounts  Receivable   24,000 

Cash    1,200 

Finished  Goods  (Jan.  i,  1917)  7,000 

Materials  Purchased   38,000 

Direct  Labor 20,000 

Indirect  Factory  Labor 4,000 

Sales  Department  Expenses 2,500 

General  Administrative  Salaries  6,000 

Interest    600 

Capital  Stock $  40,000 

Bonds  (5%)   20,000 

General  Factory  Expense 1,200 

Taxes   500 

Rent  Paid   3,000 

Sales  Discounts    1,250 

Fuel  for  Factory  3,ooo 

Insurance  on  Plant 1,150 

Freight  on  Materials  Purchased   1,500 

General  Expenses 600 

Accounts  Payable  4,000 

Sales    100,000 

Surplus    26,500 

$190,500    $190,500 
Accrued  interest  on  bonds,  $475.     Finished  goods  on  hand  Dec. 


288  PROBLEMS  AND  EXERCISES 

31,  1917,  $8,000.  Raw  materials,  Dec.  31,  1917,  $25,000.  Write 
off  2%  of  the  face  of  accounts  receivable  for  uncollectible  ac- 
counts, and  10%  of  plant  and  machinery  for  depreciation.  De- 
clare a  6%  dividend,  and  set  aside  $2,000  in  a  contingency  re- 
serve. Set  up  a  reserve  for  additions  and  betterments  of  $5,000 
out  of  the  surplus. 

15- 
The  following  is  the  trial  balance  of  a  manufacturing  com- 
pany for  Dec.  31,  1917: 

Capital  Stock    $150,000 

Bonds    100,000 

Surplus    42,000 

Mventor>-  Finished  Goods  (Jan.  i,  1917)..,.$  32,000 
I;iventory  Raw  Materials  (Jan.  i,  1917)    ....     45,000 

'T^urchases    135,000 

'^ales    479,680 

Reserve  for  Depreciation 20,000 

Reserve  for  Uncollectible  Accounts   9,600 

•Purchase  Discounts  i>730 

*^les  Discounts    2,500 

Sales  Department  Expenses    3.650 

factor}'  Wages 135,500 

*^£K\er    17,000 

•Repairs  to  Equipment 2,800 

vractory  Expense    9oOO 

vfnsurance  on  Factory  2,200 

Hant  and  Machinery 125,000 

*^dministrative  Salaries 37,ooo 

Branch  Sales  Department  Buildings 150,000 

Notes  Receivable   50,000 

Accounts   Payable    30,000 

Furniture  and  Fixtures   4,000 

^ash    75.500 

'HTaxes    960 

*A.dvertising    5.400 

$833,010     $833,010 


THE  BALANCE  SHEET  289 

On  December  31,  1917,  the  inveijtories  were  as  follows:  finished 
goods,  $26,000 :  T^v  materials,  $15,750.  The  plant  and  machin- 
ery depreciatecf^i  0,000.  The  branch  sales  building  is  depreciated 
by  ^$8,000.  Declare  a  6%  dividend.  Set  aside  a  sinking-fund 
reserve  of  $5,000,  and  a  contingency  reserve  of  $10,000.  Declare 
a  stock  dividend  of  25%. 

Prepare  a  working  sheet  and  exhibit  properly  classified  in- 
come and  balance  sheets. 

16. 

From  the  following  trial  balance  and  particulars  of  the  An- 
drews Manufacturing  Company,  prepare  income  and  surplus 
sheets. 

Trial  Balance  Dec.  31,   1917. 

Real  Estate  $  200,000^^ 

Buildings    158,000^ 

Equipment    847,500  jC 

Goodwill    150,000  > 

Common  Stock 1,000,000  v/ 

Income  Bonds  (6%)   500,000 ij^ 

Cash    46,474  )C 

Selling  Expenses   5,6oo»^ 

Interest   (Commercial)    3,300' 

Insurance    3,031  ""^ 

Accounts  Receivable   156,029^ 

Raw  Materials  Inventory  (Jan.  i,  1917)   .  94,567 

Finished  Goods  Inventory  (Jan.  i,  1917)  90,000*''^ 

Factory  Expenses  General 989*^ , 

Labor  (Factory)    585,000  '%^ 

Fuel 84,000  v^ 

Salaries  for  Salesmen 40,000  /*^- 

Salaries  General  Officers 20,000 

General  Office  Expense 5,000 1^^ 

Purchases  Raw  Material 691,985*^ 

Bond  Interest  (First  Mortgage)       2,000 i^                      , 

Discount  on  Purchases  10,120  *^ 

Accounts  Payable 5,871  ^ 


f: 


290  PROBLEMS  AND  EXERCISES 

Reserve  for  Depreciation 58,272^^ 

Sales    1,442,391V 

Notes    Payable    40,300"^ 

First  Mortgage  Bonds 100,000^ 

Surplus   26,5214- 

/  $3,183,475     $3,183,475 

Inventory  of  rav^  /Materials  Dec.  31,  1917,  $250,000;  of 
finished^oods,  $175(000.  The  uncollectible  accounts  are  estimat-K 
ed  at  1%  of  the  face  of  accounts  receivable.  Accrued  deprecia- 
tion 0n  factory,  $20,000  [♦'on  selling  departnyent  equipment,  $5,- 
000;  on  office  building  and  furniture,  ^,50©.  Accrued  interest 
on  bonds,  first  mortgage,  $2,cp<x  The  income  bonds  are  to  re- 
ceive 6%  in  case  the  requisite  amount  is  earned  over  and  above 
the  interest  on  first  mortgage  bonds. 

17- 


The  trial  balance  of  the  City  Gas  Company  for  December  31, 
19 1 6,  is  as  follows: 

Land    $  1 5,000 

Buildings    50,000 

Production  Equipment    25,000 

Gas    Mains    175,000 

Materials   2,5( 

Coal  50,000*^  / 

Labor    65,000  ^/   y 

Repairs    15,250  ^y/ 

Miscellaneous  Supplies  3, 500  ^/   / 

Superintendence   (Production)    5, 000    /     / 

Salaries  (Clerks)   8,200  t 

Salaries  General 6,500  \// 

Office  Expenses   2,200  ^ 

Insurance    1,500 

Taxes    4,500 

Interest   i,45o 

Cash   2,500 


THE  BALANCE  SHEET  291 

Consumers'  Accounts  3»5oo 

Capital  Stock    $ioo,cxx) 

Bonds    100,000 

Notes  Payable  3, 500 

Gas  Sales   210,000  -^ 

Coke  Sales   10,250  *^ 

Tar   Sales    5,ooo  ^ 

Surplus    7,850  y^ 


$436,600  $436,600 
The  depreciation  on  mains  amounts  to  i  %  ;  on  buildings  and 
equipment,  5%.  The  inventory  of  materials  amount^  to  $500; 
of  coal,  $2,000;  of  supplies,  $i,tec5b;  of  insurance,  $75;  of  coke, 
$800 ;  of  tar,  $300. 

The  directors  declare  a  10%  dividend;  set  aside  $15,000  as 
a  contingency  reserve;  place  $10,000  in  a  sinking  fund  reserve  to 
retire  the  bonds ;  and  carry  the  balance  of  net  revenue  to  Surplus. 

Prepare  working  sheet  and  income  and  balance  sheet  exhibits. 

18. 

Trial  balance  of  the  B.  Co.,  June  30,  1919,  covering  the 
period  from  Jan.  i,  1919,  to  date. 

Capital  Stock   $  $200,000 

Bonds    100,000 

Discount  on  Bonds 14,877.47 

Materials  Purchases  50,000 

Materials  Inventory 25,000 

Goods  in  Process  and  on  Hand 20,000 

Sales    120,000 

Cash   1 2,000 

Real  Estate  and  Buildings 60,000 

■Machinery  and  Tools 42,000 

Supplies   6,000 

Wages  and  Salaries 25,000 

Insurance  and  Taxes 1,200 


292  PROBLEMS  AND  EXERCISES 

Surplus   6,ocx) 

Reserve  for  Depreciation  of  Plant  and 

Equipment    8,000 

Sinking  Fund  Reserve 10,000 

Sinking  Fund  Assets 10,000 

Accounts  Receivable  15,000 

Allowance  for  Bad  Accounts 177-47 

Repairs  and  Maintenance 5-500 

Improvements  on  Leased  Property  . .  .      2,000 

Advertising    2,500 

Office  Expense  3,600 

General  Expense 1,500 

Shop  Expense 4,200 

Interest   

Rent    600 

Liberty  Bonds  144,400 

Totals $444,777.47         $444,777.47 

Adjustments 

( 1 )  Materials  and  Merchandise  Inventories  :  Materials, 
$30,000;  Goods  in  Process  and  on  Hand,  $18,000. 

(2)  Real  Estate,  Buildings,  Machinery  and  Tools  are  to  be 
depreciated  at  the  rate  of  10%  pe/  annum  on  the  net  valuation 
now  appearing  in  the  accounts.    / 

(3)  Supplies  on  haiio,  $1,000;  salaries  prepaid,  $200;  wages 
unpaid  but  accrued,  $6oo*f  taxes  accrued,  $i,20oVnsurance  unex- 
pired, $6oa 

(4)  The  Accounts  Receivable  item  should  be  written  down 
5%  of  the  gross  valuation  now  appearing  in  the  accounts. 

(5)  The  improvements  on  Leased  Property  are  valued  at 
cost. 

(6)  A  semi-annual  payment  of  bond  interest  is  due  July 
I,  1919.    The  bond  rate  is  4%  ;  the  effective  rate  is  6%. 


THE  BALANCE  SHEET 


293 


(7)  The  rent  item  covers  a  payment  to  the  B  Company 
by  another  firm  for  a  year's  rent  (Jan.  r,  191 9 — Jan.  i,  1920) 
for  office  space  in  its  building. 

From  the  above  information  prepare  a  working  sheet.  Con- 
struct classified  income  and  balance  sheet  exhibits. 


19. 

(From  "Public  Accountant  Examination,"  Massachusetts,  1914.) 

Jones  Manufacturing  Co. 

Trial  Balance,  Dec.  31,  1913. 

(Before  Closing.) 

Accounts  Payable $  22,560.71 

Accounts  Receivable   $  42,739.66 

Capital  Stock 150.000.00 

Cash  in  Banks 3,706.82 

Commission  7.750-7I 

Depreciation    12,067.30' 

Discount  on  Sales 4,986.22 

Discount  on  Purchases  6,792.40 

Finished  Product   (Inventory  at  Dec.  y^ y 

31,  1912)    1 10,630.84*^^^^/'^ 

Freight — Inward  4,709.81  •y' 

Freight — Outward   3,542.39  v 

Factory  Expense 52,796.57 •'/^ 

Insurance 5.372.99' 

Interest 3,850.00 

Labor   i79,473.82« 

Machinery  and  Equipment 120,672.96 

A'laterial  Purchased   158.691. 26y 

Material  Inventory  (At  Dec.  31,  1912) .      10,786.9(1-''''''^ 

Notes  Payable /6o,ooo.oo 

Office  and  Selling  Expenses 14.790.82*^ 

Petty  Cash 150.00 

Prepaid  Taxes 672.80 

Prepaid  Interest 375-00 


294  PROBLEMS  AND  EXERCISES 

Power  7,500.00  \^ 

Reserve  for  Depreciation 720,978.23 

Repairs 5,281.76  ^  y^ 

Rent 1 5,000.00  *^  / 

Salaries   32,250.00  V^  1 

Sales    570,478.31*^ 

Supplies   6,872.90  / 

Surplus    /42, 146.08 

Taxes   2,937.50  Vy 

Traveling  Expenses 4,836.24  *''^ 

Unexpired  Insurance   6,821.16 

Work  in  Process    (Inventory  Dec.  31, 

1912)    53-689.39 

?872,95573    $872,955.73 
Inventories  at  Dec.  31,  1913,  are:  / 

Material $     9,877.44'\/ 

Work  in  Process 56,091.29  ^  , 

Finished  Product   71,170.10  •^ 

From  the  above  Trial  Balance  and  facts  prepare : 

(a)  Balance  Sheet,  Dec.  31,  1913. 

(b)  Statement  showing  cost  of  manufacture  and  goods  sold. 

(c)  Profit  and  Loss  Account. 


XXVII 

COMPARATIVE  AND  CONSOLIDATED 
BALANCE  SHEETS 

The  Comparative  Balance  Sheet 


What  information  concerning  the  financial  history  of  a  busi- 
ness may  be  obtained  from  a  comparative  balance  sheet  that  is  not 
obtainable  from  an  income  sheet  ? 

2. 

Analyze  the  following  comparative  balance  sheet  and  state 
in  narrative  form  all  the  facts  exhibited. 

Balance  Sheet 

Dec.  31  Dec.  31 

Assets                                                          1915  1916 

Real  Estate  $  45,ooo  $  51,000 

Buildings   30,000  30,000 

Machiner)'  60,000  47oOO 

Goodwill    25,000  25,000 

Raw  Materials   10,500  8,250 

Finished   Goods    49,000  65,000 

Notes  Receivable  15,000  18,000 

Accounts  Receivable   20,000  15,000 

Investments    10,000  25,000 

Cash   12,000  11,150 


$276,500        $295,900 


296  PROBLEMS  AND  EXERCISES 

Liabilities 

Common  Stock $100,000  $100,000 

Preferred  Stock   100,000  100,000 

Mortgage  25,000 

Accounts  Payable 14,000  16,000 

Notes  Payable   26,000  i  ,000 

Reserve  for  Depreciation 22,300  28,200 

Surplus 14,200  25,700 

$276,500  $295,900 

3- 

The  following  is  a  comparative  balance  sheet  of  a  corpora- 
tion for  December  31  of  the  years  mentioned: 

Assets                                                     1914  1915 

Real  Estate $    150,000  $    150,000 

Building   323.553  316,614 

Machinery    428,968  510,897 

Additions  and  Betterments    215,500  859,684 

Merchandise   616,520  653,553 

Accounts  Receivable   210,000  225,000 

Cash    338,013  481,227 

Discount  on  Bonds 18,215  16,400 

$2,300,769  $3,213,375 
Liabilities 

Common   Stock    $    600,000  $1,200,000 

Preferred  Stock 300,000 

Bonds    450,000  800,000 

Notes  Payable    25,000  150,000 

Accounts   Payable    24,505  99,760 

Reserve  for  Sinking  Fund 175,000  200,000 

Reserve  for  Depreciation  175,000  195,000 

Surplus    851,264  268,615 

$2,300,769  $3,213,375 

Give  a  history  of  the  business  for  the  year  191 5.  Explain  as 
fully  as  possible  all  changes  on  the  liability  side. 


THE  BALANCE  SHEET  297 

4- 

The  following  is  a  comparative  balance  sheet  of  the  Beltane 
Manufacturing  Company  for  the  years  ending  December  31,  191 5 
and  1916. 

Assets                                                          1915  1916 

Real  Estate $150,000  $150,000 

Plant 150,000  130,000 

Machinery    95,ooo  90,000 

Raw  Materials  41,013  37,642 

Finished  Goods    48,687  62,358 

Notes  Receivable  50,300  40,042 

Accounts  Receivable   21,300  20,042 

Sinking  Fund 28,400  33,9i6 

Depreciation  Fund 30,000 

Cash    20,350  14,129 

$605,050  $608,129 
Liabilities 

Common  Stock $150,000  $150,000 

Preferred  Stock 150,000  150,000 

Bonds    100,000  100,000 

Notes  Payable   54,oio  16,919 

Accounts  Payable    63,101  67,294 

Sinking  Fund   28,400  33,9i6 

Reserve  for  Uncollectible  Accts 4,499  4,000 

Reserve  for  Depreciation 25,000  23,500 

Surplus    30,040  62,500 


$605,050         $608,129 

The  board  of  directors  fail  to  understand  how  there  can  be 
a  large  increase  in  surplus  and  at  the  same  time  a  considerable 
decrease  in  cash.  Prepare  a  statement  explaining  this  apparent 
discrepancy.  Would  you  advise  this  concern  to  borrow  to  pay  a 
dividend  ? 


298  PROBLEMS  AND  EXERCISES 

5. 

Comparative  balance  sheet  of  the   Perrine   Manufacturhig 
Company,  December  31 : 

Assets                                                      1915  1916 

Patents  and  Goodwill $3,204,125  $3,266,864 

Real  Estate  and  Buildings  (at  cost) 783,053  794,574 

Machinery  and  Tools  (at  cost)   635,731  655,794 

Materials    886,987  878,346 

Bonds  (Investment)    100,800  100,800 

Cash    58,319  52,045 

Accounts  Receivable   264,336  334,459 

Bond  Discount  52,553  49.937 

Insurance   (prepaid)    9,093  6,048 

Deficit    6,088 

$5,994,997  $6,144,955 
Liabilities 

Common  Stock $2,500,000  $2,500,000 

Preferred  Stock 2,000,000  2,000,000 

Bonds   1,125,000  1,117,000 

Notes  Payable    300,000  425,000 

Accounts   Payable    67,779  102,955 

Surplus    2,218 

$5,994,997  $6,144,955 
Give  a  history'  of  the  business  for  the  year  explaining  as  fully 
as  possible  the  changes  in  each  account.     Criticize  the  accounting 
practices  of  this  company. 

6. 

Comparative   balance  sheet   of  the   Kelley-Hyde   Company, 
December  31 : 

Assets                                                  1914  1913 

Patents  and  Goodwill $14,000,000  $14,000,000 

Plant  and  Machinery  (at  cost)   11,093,963  11,196,987 

Sinking  Fund   48,056  43,243 


THE  BALANCE  SHEET  299 

Materials  and  Supplies 7,502,037  8,828,582 

Notes  Receivable  31 1,240  440,254 

Accounts  Receivable   1,177,603  1,077,848 

Cash    590,769  739,iit 

Prepaid  Insurance,  etc 80,976  103,052 

$34,804,644  $36,429,077 
Liabilities 

Common  Stock $  8,750,000  $  8,750,000 

First  Preferred  Stock 9,215,000  9,215,000 

Second  Preferred  Stock 6,535,000  6,535,000 

First  Mortgage  Bonds   6,126,000  6,412,000 

Notes  Payable   453,000  1,806,200 

Accounts  Payable 220,033  600,344 

Reserve  for  Sinking  Fund 2,447,056  2,156,233 

Surplus    1,058,555  954,300 

$34,804,644  $36,429,077 

(a)  Explain  the  changes  in  all  accounts  as  far  as  possible. 

(b)  How  is  the  sinking  fund  invested? 

7- 

The  following  balance  sheet  of  the  Package  Confectionery 
Company,  (incorporated  Jan.  i,  1914,  for  the  purpose  of  taking 
over  and  expanding  already  existing  businesses),  was  published 
in  Moody's  Manual,  1916,  p.  3225.  Explain  what  is  meant  by  each 
account  and  give  a  history  of  the  enterprise  as  covered  by  the 
two  balance  sheets. 

General  Balance  Sheet, 

December  31. 

Assets 

1915  1914 

Real  Estate,  Machinery,  Etc $    534,732         $    536,633 

Cash  and  Debts  Receivable 43,299  115,122 

Inventories    157,242  143,489 

Investments    230,201  100,000 

Development  and  Organization  Expense      102,950  38,069 


300  PROBLEMS  AND  EXERCISES 

Prepaid  Items 5.686  12,565 

Copyright,  Etc 1,001,662  1,000,869 

Sinking  Fund 3,635 


Total    $2,079,407  $1,946,747 

Liabilities 

1915  1914 

Capital  Stock  $1,579,000  $1,518,000 

Bills  and  Accounts  Payable 406,140  300,684 

R.  E.  Bonds 71,000  71,000 

Expense  Accrued 4,735 

Reserves    15,102 

Surplus   3,430  37.063 

Profit  and  Loss 20,000 


Total    $2,079,407         $1,946,747 

8. 

The  following  is  a  comparative  balance  sheet  of  the  x-\mer- 
ican  Telephone  and  Telegraph  Co.,  taken  from  the  Company's 
1920  report,  p.  47. 

Assets 

Dec.  31,  1919  Dec.  31,  1920 

Stocks  of  Associated  Companies. ..  .$490,792,068  $524,445,958 
Bonds  and  Notes  of  the  Net  Advances 

to  Associated  Companies 162,137,133  190,549,044 

Stocks  of  Other  Companies 53,562,188  57,990,057 

Special  Demand  Notes   12,000,000  7.587,935 

Telephones   21,287,848  23,876,520 

Real  Estate  3.138,119  3.775-407 

Office  Furniture  and  Fixtures 336,521  435,492 

Long  Lines  Plant 82,178,606  95,136,361 

Trustees-Employees'  Stock  Purchase 

Plans   8,812,799  737,681 


THE  BALANCE  SHEET 


301 


Current  Accounts  Receivable : 
Due  from  U.  S.  Govt. 

Account  Compensation   ....  9,483,715 
Other  Current  Accounts  Re- 
ceivable     8,737,763           8,697,431 

Accounts  Receivable  in  Suspense ....  10,227,973 

Temporary  Cash  Investments   36,574,185 

Cash  and  Deposits 27,512,170         26,636,360 

Total    $926,781,088     $939,868,246 

Liabilities 

Dec.  31,  1919     Dec.  31,  1920 

Capital  Stock  $441,981,200     $442,825,400 

4%  Collateral  Trust  Bonds,  1929....  78,000,000         78,000,000 

5%  Collateral  Trust  Bonds,  1946....  77.434,900         76,461,100 

5%  Western  T.  &  T.  Co.  Bonds,  1932  9,985,000          9,985,000 

4%  Convertible  Bonds,  1936   2,589,000           2,589,000 

4^%  Convertible   Bonds,    1933 13,027,500         12,198,200 

6%  Convertible  Bonds,  1925 48,367,200         48,195,700 

6%  3-Vear  Gold  Xotes,   1922 50,000,000         50,000,000 

6%  5-Year  Gold  Notes,  1924 40.000,000         40,000,000 

Dividend  Payable  January  15th 8,839,612           8,852,072 

Interest  and  Taxes  Accrued,  not  Due  6,408,390           6,773,978 

Current  Accounts  Payable : 

Compensation  Due  Associated 

Companies  from  U.  S.  Govt.  7,858,620 

Other  Current  Accounts  Payable  6,363,800           7,422,683 

Employees'  Benefit  Fund 2,000,000           2,000,000 

Resen'e  for  Depr.  and  Contingencies  47,262,123         57,915,152 
Surplus    (Including    Capital    Stock 

Premiums  and  excluding  Debt 

Discount  and  Expense    86,663,743         96,649,961 

Total    $926,781,088     $939,868,246 


302  PROBLEMS  AND  EXERCISES 

(a)  Explain  the  significance  of  each  title. 

(b)  Prepare  a  statement  from  this  balance  sheet  similar  to 
the  one  on  page  591  of  the  text. 

(c)  State  in  narrative  form  the  history  of  the  business  for 
the  year  covered.  Make  use  of  the  income  sheet  shown  in  Prob- 
lem 21,  Chapter  XXV,  if  necessary. 

9- 

The  statement  below  is  a  comparative  balance  sheet  for  the 
American  Hide  and  Leather  Co.,  taken  from  page  53  of  Moody's 
Manual  for  1920. 

Balance  Sheet  of  Company  and  Its  Subsidiaries 
June  30 

Assets 

1919  1918     ' 

Cost  of  properties  (a)    $27,009,062  $26,838,471 

Sinking  fund  (b)    107,528  98,407 

Materials  and  supplies  (c)    11,840,993  11,889,481 

Bills  and  accounts  receivable  (d)    3,878,452  3,854,207 

Cash    1 ,926,400  1,077,946 

Liberty  loan  bonds 1,315,850  800,550 

Miscellaneous    168,61 1  158,849 

Total    $46,246,896  $44,717,91 1 

Liabilities 

Capital  stock   $24,500,000  $24,500,000 

Funded  debt  2,507,000  3,156,000 

Current  liabilities    4,270,951  3,623,459 

Sinking  fund   5,428,016  4,969,066 

Surplus    9,540,929  8,469,386 

Total    $46,246,896     $44,717,91 1 

(a)  Including  4,517  shares  preferred  and  2,259  shares  com- 
mon stock  of  the  American  Hide  &  Leather  Co.  held  in  trust. 


THE  BALANCE  SHEET 


303 


(b)  Includes  only  cash  and  accrued  interest,  the  par  value 
of  bonds  in  sinking  fund  ($4,891,000)  not  being  treated  as  an 
asset. 

(c)  After  deducting  $700,000  reserve  each  year  for  possible 
depreciation  in  values. 

(d)  After  deducting  reserve  of  $259,136  for  doubtful  debts 
and  discount. 

Statement  of  Working  Capital, 

June  30 

Current  Assets 

1919  1918 

Cash    $  1,926,400     $  1,077,946 

Bills  and  accts  recble 3,878,452         3,854,207 

Inventories 11,840,993       11,889,481 

Claims  and  sundries 7^569  15.41/ 

Liberty  loan  bonds 1,315,850  800,550 

Total   $18,969,264    $17,637,601 

Current  Liabilities 

1919  1918 

Bills  payable $1,200,000  $2,200,000 

Foreign  exchange 621,747       

Trade  accounts   461,427  605,715 

Interest  accrued   170,500  170,500 

Accrd.  taxes,  wages,  etc 1,817,277  647,244 

Total    $4,270,951     $3,623,459 

Net  working  capital,  June  30 14,698,313       14,014,142 

What  information  can  you  obtain  from  this  statement  in  ad- 
dition to  that  given  in  Problem  16,  Chapter  XXV^? 

10. 

In  Problem  17  of  Chapter  XXV  is  presented  an  income  sheet 
for  the  American  Ice  Company.  Below  is  given  a  comparative 
balance   sheet    for  this   company  taken    from   the   same   source. 


304  PROBLEMS  AND  EXERCISES 

What  additional  data  of  importance  are  you  able  to  obtain  from 
this  statement? 

Consolidated  Balance  Sheet,  October  31 

Assets 

1919  1918 

Goodwill,  water  and  patent  rights $17,024,993  $17,023,663 

General  property  account   14,519,809  14.728,212 

Stocks  and  bonds 559.959  260,690 

U.  S.  Govt,  bond  securities 663,835  207,079 

Cash   2,324,499  719-905 

Notes  and  accts.  receivable 1,061,559  1,184,716 

Fire  insurance,  etc.,  funds 592,711  587,683 

Prepaid  insurance  premiums 7»964  11,242 

Inventories,  ice,  coal,  etc 768,766  744,194 


Total    $37,524,095  $35,467,384 

Liabilities 

Preferred  stock $15,000,000  $14,920,200 

Common  stock 7,500,000  7,161,330 

Accounts  payable  843,601  642,827 

Underlying  bonds   297,200  1 15.900 

Coll.  trust  bonds,  American  Ice  Co 1,037,000  1,262,000 

First  and  gen.  mortgage  bonds 5,218,000  4,751,000 

Real  estate  mortgages 19,000  212,030 

Accrued  liabiHties   84,456  131 ,291 

Damage  claims  payable 30,910     

R.  E.  mortgages  payable  Jan.  16,  1920.  .  110,000     

Reserve  for  taxes 396,162     

Reserves   554-996  737.231 

•Surplus   6,432,770  ■  5.533.575 


Total    $37,524,095     $35,467,384 


THE  BALANCE  SHEET  305 

Statement  of  Working  Capital,  October  31 
Current  Assets 

1919  1918 

Cash   $2,324,499  $    719,905 

Accounts  receivable 1,061,559  1,184,716 

Inventories    768,766  744,194 

U.  S.  Govt,  securities  663,835  207,079 


Total    $4,818,659  $2,855,894 

Current  Liabilities 

Accounts  payable   $    843,601  $    642,827 

Accrued  int.  and  rents 84,456  131,291 

Damage  claims  payable 30,910     

R.  E.  mortgages  payable  Jan.  16,  1920.  .  110,000     

Reser\-e  for  taxes 396,162      


Total    $1,465,129     $    774,118 

Net  working  capital,  October  31 3-353,530       2.081,776 

II. 

Assets 

As  at  As  at 

Dec.  31,  1917  Dec.  31,  1918 
Current  Assets : 
Cash : 

In  banks $      28,950       $        78,751 

On    hand    at    stores    and    fac-  "^ 

tories 5,558  4,749' 


$      34,508       $       83.500 


Notes  receivable  $        3,^47       $  3,i78 

Accounts  receivable 490,245  455,444 


$   493,392       $      458,622 


3o6  PROBLEMS  AND  EXERCISES 

Stock  on  Hand : 

Materials   $2,966,809  $  3,395458 

Finished  goods 682,736  206,515 

Supplies,  revenue  stamps,  etc..        62,828  156,387 

$3-712,373  $  3-758,360 

Investments  $      20,021  S       20,021 

Liberty  bonds   64,000  390-OOO 

Libertv  bonds — employees'  fund.  .  .        25,000  4,800 

Fixed  Assets,  Less  Depreciation : 

Real  estate $    373-9^6  $     433-214 

Mchry.,  fixt.  and  impr 155.858  267,011 

Automobiles 2,855  12,832 

$    532,679  $      713-057 

Charges  deferred  to  future  opera- 
tions     $      79,426  $        68.482 

Goodwill  5,000,000  5,000.000 

$9,961,399  $10,496,842 
Liabilities 

As  at  As  at 

Dec.  31,  1917  Dec.  31,  1918 
Current  Liabilities: 
Notes  Payable : 

General  $    220,000  S     410,000 

For  Liberty  bonds 225.000 

Accounts  payable   71,286  69,063 

Accrued  state  and  federal  taxes...       144.766  144.430 

Dividends  unpaid 490 

$   436,052  S      848.983 

Mortgage  on  Johnstown  plant 35-OOo 

S      883,983 


THE  BALANCE  SHEET 


307 


Excess  of  par  value  over  amount  paid 
for  preferred  stock  acquired  and 
not  cancelled   $  193       $  1,020 


Capital  Stock : 

Preferred,     7%     cumulative,     less 

shares  retired  and  reacquired $2,600,000       $  2,552,100 

Common,  60,000  shares 6,000,000  6,000,000 


$8,600,000      $  8,552,100 


Surplus  appropriated  for  retirement 

of  preferred  stock  $    390,000       $     447,900 

Surplus   535-154  611,839 


$925,154      $  1,059,739 


$9,961,399       $10,496,842 

(a)  Study  the  above  statement  and  explain  the  significant 
changes  in  amounts  between  years. 

(b)  What  is  the  common  stockholders'  equity  on  Dec.  31, 
1917?  The  book  value  per  share?  Answer  same  questions  for 
1918. 

(c)  Assuming  the  regular  preferred  dividend  was  paid  dur- 
ing 1918  and  10%  on  common,  what  was  the  net  proprietary  m- 
come  for  the  year? 

12. 

Explain  the  principal  changes  occurring  between  years  in 
the  following  comparative  balance  sheet,  and,  assuming  no  divi- 
dends have  been  paid,  state  the  net  proprietary  income  for  the 
year  1918.  What  is  the  excess  of  assets  over  liabilities  on  Dec. 
31,  1918?  If  you  were  a  government  auditor,  scrutinizing  this 
statement  in  connection  with  the  company's  tax  return,  what 
situations  exhibited  in  this  statement  would  you  consider  merited 
full  investigation? 


3o8  PROBLEMS  AND  EXERCISES 

Balance  Sheets  as  at  December  31 

Assets 

1917  1918 

Office  Furniture  and  Fixtures $     2,746 

Cash    $  66,224  230,652 

Account  Receivable  71,240  215,035 

Salesmen's   Advances    6,292       

Notes  Receivable   703  253 

]\Idse.  Inventor}'   58.016  64,000 

Liberty  and  Other  Bonds 15,000  58.348 

Land  and  Buildings 136,142  182,125 

]\Ichry.,  Tools  and  Fixtures 41,194  Z7^^7^ 

Punches,  Dies,  Moulds  60,488  i7,573 

X.  Y.  Fur.  &  Fix 1,361  1,512 

Patents,  Trade-Marks,  etc 40,000  20,000 

Organization  Expense 30.738        

Unexpired  Insurance   925  5,053 

Treasury  Stock  —  C 38,000 

Miscellaneous    107 


Total  Assets   $528,323  $872,674 

Liabilities 

Capital  Stock  —  C $102,000  $140,000 

Capital  Stock  —  P 142,635  150,000 

Notes  Payable  22,840  75,132 

Accts.  Payable 80.182  157,601 

Salesman's  Acct 1,835       

Accrued  Taxes 1,640       

Accrued  Interest    475       

Accrued  Salaries  i  ,932       

J.  Smith 500       

Notes  Rec.  (discounted)   518       

Mt'g  Payable  (i  and  2)   54oOO  211.280 

Surplus   1 19,266  64,162 

Reserve  for  Depreciation 48,303 


THE  BALANCE  SHEET  309 

Accrued  Payroll  7,33i 

Reserve  for  Doubtful  Accounts   555 

Liability  for  Employees  Bond  Subsc 5)275 

A.  Johnson,  Commission 2,266 

L.  O.  Myrtle,  Commission 6,863 

L.  O.  Myrtle,  Commission 3>729 

Miscellaneous    177 


Total  Liabilities   $528,323     $872,674 

THE  CONSOLIDATED  BALANCE  SHEET 
13. 

Balance  sheet  for  the  Meeker  Promotion  Company,  Decem- 
ber 31,  1916: 

Assets 

Real  Estate $      35,025 

Building  and  Equipment 299,757 

Stocks  in  Associated  Co.'s 1,225,000 

Notes  Receivable  90,500 

Accounts  Receivable   14,980 

Cash    124,341 

Bond  Discount  13,980 

Deficit 100,214 

$  1. 903,797 
Liabilities 

Capital  Stock    $1,000,000 

Bonds    580,000 

Notes  Payable 4i,740 

Accounts  Payable    10,733 

Sinking  Fund  Reserve   170,000 

Reserve  for  Accrued  Depreciation.  .        80,324 
Reserve  for  Addition  to  Plant 21,000 

$1,903^797 


3ro 


PROBLEMS  AND  EXERCISES 


(a)  Explain  the  meaning  of  each  account  appearing  in  this 
balance  sheet. 

(b)  In  case  of  dissolution  how  much  would  the  stockholders 
receive,  assuming  all  items  valued  on  a  realizable  basis. 

(c)  What  further  information  should  be  given  with  a  bal- 
ance sheet  for  a  corporation  of  this  type? 

14. 

The  ]\Ieeker  Promotion  Company,  whose  balance  sheet  was 
given  in  the  preceding  problem,  owns  $1,225,000  (par  value) 
stock  of  the  Carter  Manufacturing  Company  (half  common  and 
half  preferred).  The  following  is  a  comparative  balance  sheet  of 
the  Carter  Manufacturing  Company  for  the  years  ending  De- 
cember 31,  1915  and  1916: 

Assets  1916  1915 

Land  $      15,200        $      15,200 

Buildings    127,599  120,224 

Equipment   320,323  302,052 

Bills  Receivable   17,642  17,833 

Accounts  Receivable   39,3 14  8,467 

Finished  Goods    145,289  165,247 

Raw  Materials   413,602  496,452 

Cash    45763  29,153 

Deficit 192,796  170,412 

$1,317,528  $1,325,040 
Liabilities 

Common  Stock $    650,000  $    650,000 

Preferred  Stock 650,000  650,000 

Notes  Payable 10,500  18,600 

Accounts  Payable 7,028  6,440 


$1,317,528        $1,325,040 
(a)  Assuming  that  the  accounts  as  shown  are  correct,  what 
would  be  your  opinion  as  to  the  solvency  of  the  Carter  Manufac- 
turing Co.? 


THE  BALANCE  SHEET  31 X 

(b)  Prepare  a  consolidated  balance  sheet  for  the  Meeker 
Promotion  Company  and  the  associated  company. 

(c)  How  much  would  the  stockholders  of  the  Meeker  Com- 
pany realize  in  case  of  the  dissolution  of  both  corporations  ? 

Assuming  that  you  have  obtained  the  following  information 
in  regard  to  items  appearing  on  the  balance  sheet  of  the  Carter 
Manufacturing  Company,  prepare  a  new  balance  sheet  for  that 
company.  The  buildings  are  carried  at  cost,  while  the  value 
(1916)  was  80%  of  cost.  The  Equipment  account  has  been 
charged  with  various  renewals  but  no  depreciation  has  been 
allowed;  this  property  is  overstated  by  $35,000.  The  finished 
goods  were  inventoried  at  cost  price  in  191 5  and  at  selling  price 
in  1916.  The  cost  price  is  75%  of  selling  price.  The  preferred 
stock  is  6%  cumulative,  and  no  dividends  have  been  paid  in  four 
years. 

With  this  additional  information  prepare  a  new  consolidated 
balance  sheet.  How  much  would  the  stockholders  receive  now  in 
case  of  dissolution? 

16. 

A  certain  holding  company  owns  90%  of  the  stock  of  a  sub- 
sidiary. The  subsidiary  company  has  an  issue  of  $500,000  first- 
mortgage  bonds  outstanding.  The  assets  are  not  sufficient  to  pay 
more  than  75%  of  the  par  of  the  bonds,  the  stock  being  absolutely 
worthless.  You  are  asked  to  state  how  the  holding  company 
should  show  its  ownership  in  the  subsidiary  company  on  its  bal- 
ance sheet. 

17- 

A  consolidated  balance  sheet  for  the  American  Telephone 
and  Telegraph  Co.,  as  given  in  the  Company's  report  for  1920, 
page  37,  is  reproduced  below. 


312  PROBLEMS  AND  EXERCISES 

Bell  System  Balance  Sheets,  1919  and  1920 
(Duplications  Excluded) 

Assets 

Dec.  31,  1919  Dec.  31,   1920 

Telephone  Plant $1,215,944,184  $1,363,826,327 

Supplies.  Tolls,  etc 38,035,034         47,442,043 

Receivables    84,409,519  66,351,159 

Cash   72,879,842  41,399.285 

Stocks  and  Bonds   118,806,351         115,230,719 

Total    $1,530,074,930  $1,634,249,533 

Liabilities 

Capital  Stock  $    512,121,868  $    511,493,407 

^Mortgage  Bonds   191,163.060  213,571,750 

Collateral  Trust  Bonds 165,369.900  164.396,100 

Convertible  Bonds  and  Notes 63,983.700  80,495,900 

Debentures    35,686.100  37.330.325 

Three-  and  Five- Year  Gold  Notes.        90,000,000  90,000,000 

Bills  Payable   1,774,207  10,130,141 

Accounts  Payable   72,158,014  73.429,492 

Total  Outstanding  Obligations  $1,132,256,849  $1,180,847,115 

Employees'  Benefit  Fund  9,244,081  9.363,215 

Surplus  and  Reser\'es 388.574,000        444.039.203 

Total   $1,530,074,930  $1,634,249,533 

(a)  Explain  as  far  as  possible  the  differences  betewen  items 
in  this  statement  and  those  in  the  balance  sheet  given  in  Problem 
8,  preceding. 

(b)  Making  use  of  the  data  given  in  Problem  21,  Chapter 
XXV.  and  Problem  8  in  this  Chapter,  in  addition  to  the  material 
presented  in  this  problem,  prepare  a  report  covering  the  financial 
operations  of  this  company  for  the  year  1920. 


XXVIII 

STATEMENTS  OF  INSOLVENCY 

Statement  of  Affairs 

I. 

What  is  meant  by  a  statement  of  affairs  and  when  is  it  drawn 
up? 

2. 

The  following  comparative  balance  sheet  of  the  Rockhill 
Manufacturing  Co.  is  submitted  to  the  creditors  on  June  30,  1917. 
The  company  had  failed  to  pay  the  interest  on  bonds  at  the  last 
interest  payment  date.  State  your  opinion  as  to  the  solvency  of 
the  concern. 

General  Balance  Sheet, 
June  30. 

Assets 

1917  1916 

Plant  and  Equipment $1,909,881         $1,903,334 

Materials  and  Supplies 3i,39i  38,881 

Cash  and  Bills  Receivable 30,785  29,941 

Current  Accounts    27,197  13,661 

Other  Assets 133,063  122,947 

Deferred  Debit  Items  4,661 

Profit  and  Loss  67,839  45,796 

Total    $2,204,817  $2,154,560 

Liabilities 

1917  1916 

Capital  Stock '. $    500,000  $    500,000 

Bonded  Debt 1,351,000  1,351,000 


314  PROBLEMS  AND  EXERCISES 

Current  Liabilities   327,726  ^7Z>7^^ 

Accrued  Interest   13,884  13,342 

Deferred  Credit  Items 12,207  16,492 


Total ..$2,204,817         $2,154,560 

3. 

The  bondholders  (Problem  2)  decide  to  bring  insolvency  pro- 
ceedings. Accordingly  a  trustee  is  appointed  and  is  directed  by 
the  court  to  wind  up  the  affairs  of  the  company.  On  investigation 
he  finds  the  following  facts: 

(a)  The  plant  and  equipment  will  probably  bring  $980,000 
at  forced  sale. 

(b)  Materials  and  supplies  will  bring  $25,000. 

(c)  The  amount  of  actual  cash  on  hand  is  $15,000.  The 
notes  (bills  receivable)  are  worth  about  $12,250. 

(d)  The  uncollectible  accounts  amount  to  about  $3,150. 

(e)  Other  assets  consist  of  supplies,  etc.,  which  will  yield 
$75,000. 

(f)  The  deferred  assets  are  worthless. 

(g)  The  bonds  are  secured  only  by  a  mortgage  on  the  plant 
and  equipment. 

(h)   All  other  liabilities  are  unsecured. 

Draw  up  a  statement  of  affairs  on  the  basis  of  these  facts 
showing  approximately  the  amount  which  unsecured  creditors  will 
receive  on  the  dollar. 

4- 

"The  statement  of  affairs  is  in  effect  a  balance  sheet  for  an 
insolvent  concern." 

Comment  on  this  statement. 


STATEMENTS  OF  INSOLVENCY  315 

Deficiency  Statement 


Compare  the  deficiency  statement  with  a  statement  of  sim- 
ilar content  for  a  going  concern. 


Suppose  that  the  estimates  in  the  last  problem  prove  correct 
and  that  the  trustee's  fees  and  expenses  amount  to  $2,000,  draw 
up  a  deficiency  statement. 

7- 

Suppose  that  instead  of  finding  a  purchaser  for  each  separate 
asset  (problem  3)  the  trustee  sells  the  business  as  a  whole  for  a 
consideration  of  $1,250,000,  but  the  trustee  is  to  settle  all  out- 
standing liabilities.  Prepare  a  deficiency  statement  assuming 
again  that  the  trustee's  fees  and  expenses  amount  to  $2,000. 


XXIX 
COST  ACCOUNTING 

The  Problems  of  Management 

z. 

Give  a  general  statement  of  the  field  of  cost  accounting. 

2. 

State  some  of  the  specific  questions  concerning  which  the 
manager  may  desire  information. 

3. 

Show  that  the  ordinary  financial  accounts,  properly  classified, 
furnish  much  information  of  value  to  the  manager.  What  figures 
particularly  may  be  used  (comparatively)  as  a  rough  test  of 
efficiency  ? 

4. 

Make  a  list  of  the  important  classes  of  data  that  might  be 
required  from  the  cost  accounts  that  are  not  expressed  in  finan- 
cial terms. 

5. 

'"Cost  accounting  consists  in  an  analysis  of  the  internal  pro- 
cesses of  production." 

Does  this  statement  cover  the  situation  ?  What  other  data 
than  costs  are  required  by  the  manager? 

6. 

To  what  extent  may  cost  statistics,  showing  unit  costs  of  pro- 
duction, be  used  by  those  ultimately  in  control  in  testing  the  effi- 
ciency of  the  immediate  management? 


COST  ACCOUNTING  317 

7- 

Contrast  economic  cost  of  production  and  expense.  Explain 
carefully,  with  illustrations,  why  the  manager  must  take  economic 
cost  into  consideration.  Argue,  however,  that  this  fact  need  not 
involve  the  charging  of  interest  or  other  phases  of  income  to  ex- 
pense accounts. 

8. 

The  management  of  a  certain  corporation  is  considering  the 
introduction  of  new  types  of  machines  to  replace  certain  older 
hand  processes.  This  innovation  will  require  an  outlay  of  $35,000. 
Of  this  amount  $10,000  is  now  available  in  the  corporation's 
funds.  It  will  be  necessar)%  however,  to  secure  new  capital 
amounting  to  $25,000.  The  rate  of  return  required  will  probably 
approximate  6%.  To  introduce  these  new  methods  will  require 
the  scrapping  of  property  amounting  to  $3,000  (book  value  less 
am.ount  in  reserve).  Labor  cost  and  other  expense  will  be  re- 
duced $3,300  for  the  number  of  units  of  product  ordinarily  pro- 
duced in  one  year  by  the  old  system. 

Will  it  pay  the  corporation,  from  the  standpoint  of  the 
present  equities,  to  make  this  innovation,  assuming  the  average 
return  to  the  capital  now  invested  is  7%  ? 

Is  there  any  occasion  to  charge  interest  on  the  capital  in- 
volved in  the  accounts  as  a  cost  whether  the  change  is  adopted 
or  not? 

Suppose  that  one  department  of  the  enterprise  has  already 
adopted  the  improved  methods,  for  experimental  purposes,  but 
that  all  similar  productive  units  are  using  the  old  method ;  should 
total  economic  cost  be  charged  to  the  expense  accounts  of  each 
department  so  that  these  accounts  may  be  used  for  comparative 
purposes  ? 

9. 
Explain  the  difficulties  involved  in  charging  interest  as   a 
cost  where  several  contractual  equities  requiring  different  rates 
of  return  are  involved.     What  should  be  done  with  proprietor- 
ship capital,  particularly  if  no  rate  is  specified?    If  interest  as  a 


3i8  PROBLEMS  AND  EXERCISES 

cost  is  charged  should  it  cover  the  amount  invested  in   fixed 
assets  only,  or  the  value  of  current  assets  as  well? 

10. 

What  are  the  problems  of  the  cost  accountant  in  the  case  of 
an  establishment  or  firm  producing  but  one  product?  Can  you 
give  an  illustration  of  such  an  enterprise?  Would  it  be  fair  to 
say  that  a  company  producing  only  tin  cans  was  making  a  single 
product?    Explain  fully. 

II. 

What  are  the  further  problems  of  the  manager  and  cost 
accountant  in  the  case  of  an  enterprise  producing  several  pro- 
ducts?   Illustrate. 

12. 

Show  that  if  bond  interest  is  included  as  an  expense  in 
accounting  it  is  also  proper  by  the  same  reasoning  to  consider 
preferred  dividends,  and  even  dividends  on  common  stock,  as 
likewise  an  expense. 

The  Classification  and  Distribution  of  Expense 

13. 

"The  needs  and  purposes  of  the  manager  should  determine 
the  character  of  the  expense  classification  adopted  in  any  case." 
Support  this  statement. 

14. 

Give  an  illustrative  classification  of  expense  for  some  small 
enterprise  with  which  you  are  familiar,  which  will,  in  your  judg- 
ment, reveal  the  important  facts  concerning  costs  which  the 
management  should  know. 

15. 

Illustrate  the  difficulty  in  concrete  cases  of  drawing  the  line 
between  direct  and  indirect  expense. 


COST  ACCOUNTING  319 

16. 

Discuss  the  problem  of  allocating  indirect  expense  to  units 
of  product  or  to  departments  or  phases  of  the  business.  Show 
that  any  such  allocation  is  bound  to  be  more  or  less  arbitrary. 

17. 

The  products  of  a  sheep  ranch  are  primarily  mutton  and 
wool.  How  is  the  manager  going  to  distribute  total  expense  be- 
tween these  two  products  ?  Show  that  many  analogous  problems 
arise  in  allocating  expense  in  manufacturing  and  other  industries. 

18. 

Explain  the  particular  difficulties  facing  the  cost  accountant 
in  the  railroad  industry. 

19. 

A  certain  manufacturer  who  was  arguing  in  favor  of  fixing 
specific  rates  for  a  railroad  on  the  basis  of  cost,  used  his  own 
experience  in  the  manufacturing  business  as  an  illustration.  He 
explained  that  he  was  manufacturing  four  different  articles. 
Prices  were  fixed  on  the  basis  of  the  cost  system  employed,  and 
as  proof  that  his  costs  were  accurate  the  manufacturer  submitted 
a  statement  of  expenses  properly  apportioned  on  a  '"scientific" 
basis  to  each  product.  The  total  of  the  sums  apportioned  to  the 
separate  products  equalled  100%  of  the  total  expense;  therefore 
the  costs  found  were  accurate  ! 

This  case  illustrates  the  careless  analysis  prevalent  in  popular 
conceptions  of  cost  accounting.    Discuss. 

20. 

Describe  some  of  the  important  cost  records  needed  by  a 
printing  company  which  attempts  to  distribute  expense  on  the 
basis  of  the  "job." 


XXX 

MUNICIPAL  ACCOUNTING 


I. 


In  what  ways  may  municipal  and  business  corporations  be 
considered  alike  from  the  standpoint  of  the  accountant  ? 

2. 

Contrast  the  main  purposes  for  which  municipal  accounts 
are  kept  with  those  for  which  a  business  firm's  accounts  are  kept. 

The  Municipal  Balance  Sheet 

3. 

State  fully  the  purposes  which  can  be  served  by  the  use  of 
a  municipal  balance  sheet. 

4. 

What  significance  may  be  attached  to  the  item  on  the  liability 
side  of  the  municipal  balance  sheet  which  represents  the  excess 
of  assets  over  liabilities?  Would  the  term  "equity,"  as  used  in 
Chapter  II  of  the  text,  apply  to  this  item? 

5. 

'Tt  is  impossible  to  prepare  a  balance  sheet  for  a  city.  How 
can  a  money  value  be  placed  on  such  improvements  as  parks, 
health  laboratories  and  other  equipment  used  for  improving  the 
moral  and  physical  condition  of  the  community?  These  have  a 
value  far  in  excess  of  their  cost  to  the  city."  Could  you  agree 
with  the  thought  expressed  in  the  third  sentence  of  the  above 
quotation  and  disagree  with  the  first?    Explain  fully. 


MUNICIPAL   ACCOUNTING 


6. 


321 


What  steps  would  have  to  be  taken  to  prepare  the  first  bal- 
ance sheet  for  a  city? 

7- 

"The  presence  of  a  deficit  item  on  a  municipal  balance  sheet 
at  any  time  would  not  lead  to  such  serious  difiiculties  as  would 
be  likely  to  ensue  in  the  case  of  a  corporation  whose  balance 
sheet  showed  a  similar  item.  Furthermore,  a  city's  statement 
might  show  a  deficit  at  a  particular  time  without  reflecting  dis- 
credit upon  the  city  administration.  But  if  such  an  item  contin- 
ued to  exist  from  year  to  year  it  would  indicate  a  short-sighted 
policy  on  the  part  of  the  municipality." 

Explain  what  is  meant  and  support. 


In  191 5  the  party  in  control  of  the  municipal  offices  in  a 
small  city  attempts  to  re-elect  its  officers  on  the  basis  of  a  claim 
for  efficient  management  of  municipal  finances.  A  reduced  tax 
rate  is  urged  as  one  indication  of  this  efficiency.  An  accountant, 
employed  by  the  opposition  party,  presents  the  following  com- 
parative balance  sheet  (in  summary  form)  as  a  refutation  of  this 
claim : 

City  of  Langley 

Fixed  Assets $1,750,000        $1,885,000 

Current  Assets  55,ooo  8,500 

$1,805,000  $1,893,500 

Bonded   Debt    $1,500,000  $1,650,000 

Current  Debt 200,000  225,000 

Surplus    105,000  28,500 

$1,805,000        $1,893,500 
What  bearing  does  this  statement  have  upon  a  reduction  of 
the  tax  rate  and  the  general  contention  of  the  party  in  power  .^ 
Explain  fully. 


322  PROBLEMS  AND  EXERCISES 

The  Municipal  Income  Sheet 

9. 

Explain  why  an  income  sheet  is  of  more  importance  to  a  city 
than  a  statement  of  receipts  and  disbursements  for  the  same 
period. 

10. 

Outline  a  model  form  of  income  sheet  which  could  be  used 
by  a  small  city. 

II. 

"Cost  accounts  have  practically  as  important  a  function  in 
the  modern  municipality  as  in  the  private  business  organization." 
Explain  why  this  is  true. 

12. 

It  is  essential  that  a  city  submit  a  special  income  sheet  for 
each  commercial  service  performed.  These  sheets  can  be  used 
for  comparative  purposes  in  disputes  concerning  the  relative 
merits  of  municipal  and  private  ownership  from  the  standpoint 
of  operating  efficiency. 

Show  how  the  income  sheets  may  be  used  for  this  purpose. 

13- 

What  relative  importance  do  you  attach  to  the  operating  and 
net  revenue  divisions  of  the  municipal  income  sheet? 

14. 

The  city  of  Medville  owns  its  own  water  and  electric  light 
plants.  The  estimated  cost  of  the  water  used  for  fire  protection 
in  1916  is  $5,200;  for  the  city  hall,  $175;  for  public  parks,  $585. 
The  estimated  cost  of  electricity  used  for  street  lighting  is 
$10,500;  for  the  city  hall  $120;  for  special  park  lighting,  $150. 

Give  the  journal  entries  you  would  make  covering  the  above, 
and  explain  the  effect  of  each  entry  on  the  income  sheet  for  each 
department  of  the  city. 


MUNICIPAL  ACCOUNTING  323 

15. 

A  city  which  owns  and  operates  its  own  water  and  electric 
light  plants,  uses  the  same  power  plant  for  both.  What  accounts 
should  be  kept  to  properly  charge  each  department  with  its  share 
of  the  cost  of  producing  power? 

The  Municipal  Budget 

16. 

Explain  the  nature  and  function  of  a  budget  as  applied  to 
municipal  finances. 

17- 

Outline  a  model  form  for  a  municipal  budget  showing  which 
accounting  statements  are  used  for  making  estimates. 

18. 

How  may  a  budget  program  be  used  as  an  aid  to  the  citizens 
in  controlling  the  acts  of  city  officials? 

19. 

A  city  orders  a  street  paved.  The  contract  cost  is  $75,000. 
Bonds  bearing  5%  interest,  and  maturing  in  10  years,  are  issued 
at  par  to  meet  the  payment.  It  is  planned  to  charge  the  abutting 
property  owners  with  the  whole  cost  of  the  improvement,  the 
assessments  to  be  made  in  ten  equal  installments.  Give  the  entries 
that  you  would  make  on  the  city's  books  at:  the  time  the  bonds 
are  issued;  when  the  payment  is  made  to  the  contractor;  and  at 
the  collection  of  the  first  two  assessments,  assuming  that  the 
double-entry  system  of  bookkeeping  is  used.  What  special 
ledgers  and  controlling  accounts  would  be  necessary? 


XXXI 

RAILROAD  ACCOUNTING 

I. 

What  situation  has  given  rise  to  the  present  emphasis  upon 
public  utiHty  accounting? 

The  I.  C.  C.  Classifications 

2. 

Give  examples  of  some  of  the  accounts  in  the  I.  C.  C.  classi- 
fication, "Investment  in  Road  and  Equipment."  What  is  the 
purpose  of  this  classification? 

3. 

Explain  the  situation  which  has  made  the  present  railway 
balance  sheet  figures  for  the  fixed  assets  of  mainly  nominal 
significance. 

4- 

A  railroad  company  removes  old  rails  with  a  book  value 
(less  the  credits  to  the  reserve)  of  $2,500.  Salvage  value  amounts 
to  but  $1,200.    What  journal  entries  should  be  made? 

The  cost  of  the  above  rails  (and  the  book  value  before  de- 
ducting the  amount  in  reserve)  is,  we  will  suppose,  $5,000.  These 
rails  are  of  the  seventy-pound  type.  The  present  cost  of  the 
same  number  of  similar  rails  is  $6,000.  New  rails  (ninety-pound 
type)  which  cost  $8,000  are  laid  to  replace  the  old.  Give  the 
entries  which  would  be  made  covering  this  replacement  according 
to  the  rules  of  the  I.  C.  C.  Commission.  What  is  now  the  amount 
of  property  appearing  in  the  in  the  Rails  account  as  far  as  the 
items  mentioned  are  concerned?  Do  you  agree  with  this  pro- 
cedure?   Explain  fully. 


RAILROAD  ACCOUNTING 


325 


5- 

Why  is  it  an  error  in  accounting  principle  to  charge  bond 
discount  to  a  profit  and  loss  (or  surplus)  account? 

6. 

Name  the  several  groups  of  accounts  found  on  the  prescribed 
railway  balance  sheet?  Interpret  each  of  these  groups.  Can  you 
suggest  a  more  logical  arrangement? 

7- 

In  a  railway  income  statement  you  find  listed  among  "de- 
ductions from  gross  income"  the  following  items : 

Hire  of  equipment ; 

Rent  for  leased  roads; 

Interest  on  funded  debt ; 

Interest  on  unfunded  debt; 

Loss  from  operation  of  leased  roads. 

Are  these  all  congruous  items  ?    Explain  fully. 

8. 

What  are  the  main  groups  of  accounts  in  the  Expense  and 
Revenue  classifications?  Explain  the  meaning  of  each  of  the 
main  divisions  used. 

9- 

Study  the  railway  statements  presented  in  Appendix  C  of 
the  text  (pp.  668-674).  Explain  the  significance  of  each  of  the 
main  classes  in  each  statement. 

Rate  Regulation  and  Accounting 

10. 

Discuss  the  relation  between  rate  regulation  and  the  import- 
ance of  sound  accounting  practice.  Why  is  it  less  important  that 
the  accounts  reflect  the  value  of  the  assets  used  in  the  case  of  the 
competitive  than  the  public-utility  enterprise? 


326.,  PROBLEMS  AND  EXERCISES 


II. 


Discuss  the  relative  merits  of  original  cost  and  present  value 
as  bases  for  measuring  the  values  of  the  assets  of  public  utilities. 


12. 


Shovi^  that  present  value  requires  the  recognition  of  both  ap- 
preciation and  depreciation.  Does  a  property  at  ioo%  efficiency 
necessarily  represent  ioo%  of  the  investment?     Explain  fully. 

13. 

Is  there  need  for  quite  different  accounting  principles  in  the 
public  utility  field  as  compared  with  competitive  industry? 


XXXII 
AUDITING 

The  Purposes  of  Audits 

I. 

What  do  you  understand  by  an  audit  and  auditing? 

2.. 

What  are  the  general  purposes  of  audits  ? 

3. 

Give  several  examples  of  specific  inquiries  which  give  rise 
to  audits. 

4- 

Illustrate  the  fact  that  government  regulation  leads  to  many 
examinations  of  accounting  records.  Do  you  suppose  the  passage 
of  the  corporation  income  tax  increased  the  work  of  auditors? 
Will  the  present  "excess-profit"  and  similar  taxes  have  any 
effect  on  such  work? 

5. 

Would  you  expect  disputes  between  employers  and  labor 
unions  over  wage  contracts  to  give  rise  to  "audits"  of  any  kind? 
Explain. 

6. 

Give  several  illustrations  of  situations  which  might  give  rise 
to  demands  for  audits  by  parties  in  no  way  financially  interested 
in  the  enterprise  involved  in  any  case. 


328  PROBLEMS  AND  EXERCISES 

The  Essentials  of  Auditing 


Illustrate  the  fact  that  the  verification  of  clerical  accuracy 
does  not  prove  that  sound  accounting  principles  have  been  ob- 
served. Does  the  fact  that  debits  equal  credits  prove  that  no 
misappropriations  have  been  made?  What  conclusion  can  you 
draw  as  to  the  point  of  emphasis  for  the  auditor? 

8. 

Name  the  essential  qualifications  of  an  auditor. 


A  shortage  is  suspected  in  funds  under  the  control  of  a 
municipal  officer.  You  are  called  to  examine  the  books.  You  find 
all  journal  entries  correctly  posted,  and  you  take  off  a  trial  balance 
which  "proves."  Just  what  does  this  indicate?  Does  it  prove 
that  there  have  been  no  defalcations  ?    Explain. 

10. 

In  auditing  the  books  of  a  company  you  find  that  a  very  in- 
significant allowance  has  been  made  for  depreciation  of  buildings. 
In  all  other  respects  the  books  are  correct  and  sound  account- 
ing principles  have  been  observed.  In  preparing  statements 
and  making  your  report  as  to  the  financial  condition  of  the  com- 
pany would  you  raise  this  point,  and  if  so,  in  what  way?  Would 
you  feel  called  upon,  as  an  auditor,  to  make  a  valuation  of  the 
buildings?  Is  the  valuation  of  assets  ever  a  part  of  the  auditor's 
work?    Discuss  fully. 

II. 

You  are  called  in  by  an  officer  of  a  small  concern  to  prepare 
an  income  sheet  for  tax-report  purposes.  The  books  have  not 
been  kept  by  complete  double-entry.    Accounts  are  kept  in  which 


AUDITING 


329 


are  recorded  all  merchandise  and  other  assets  purchased.  A  list 
of  all  notes  and  accounts  payable  is  available.  The  Cash  account 
shows  a  record  of  all  receipts  and  disbursements.  Cards  are 
available  showing  the  status  of  each  customer.  No  proprietor- 
ship accounts  are  kept. 

State  how  you  would  proceed  in  preparing  the  statement 
required. 

12. 

What  is  the  best  general  guide  for  the  auditor  in  formulat- 
ing valuation  rules  in  a  particular  case,  or  in  any  other  phase  of 
his  work? 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
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THIS   BOOK   ON   THE   DATE   DUE.   THE   PENALTY 
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DAY    Apip    TfO^  $l.pq^^,?JN    THE    SEVENTH     DAY 
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37 


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